Investors begin to desert gold as exchange-traded fund outflows surge

Investors are exiting gold and fund flow has turned negative. For the first time since 2010, gold holdings in the physically-backed exchange traded products (ETPs) has declined below 2,000 tonnes with outflows gaining momentum in the last few days. The recent fall in price below $1,250 an ounce triggered the move.

In the first three weeks of this month over 30 tonnes were redeemed.Interestingly, this time last year, major ETP holdings had reached a record 2,600 tonnes when gold market prices were in the range of $1,650-1,750. However, from the first quarter of this year, net outflows, and not inflows, have been a regular feature.

A primary reason for weak investor sentiment is that gold returned a mere 6 per cent on investment in 2012 (versus double-digit returns in the previous ten years); also, low expectation of a higher return in 2013. Market prices have been constantly under downward pressure in recent months.

In the futures market too, investors have reduced their exposure to the yellow metal. Latest data from the US futures market regulator CFTC showed that tactical investors have scaled back their exposure to gold again so far this month.

Net fund length has declined, driven mostly by establishment of fresh short positioning along with reduction in long positioning.

“Net non-commercial positioning sits at its lowest since July, and gross shorts are now at a 14-week high, as sentiment towards gold has turned increasingly bearish,” commented an expert.

Non-commercials are not hedgers but speculators.

There are many drivers of and dimensions to the gold market and most of them are not supportive of higher prices at this point in time.

Even as the investor sentiment is decidedly weak, the macroeconomic environment is neutral because growth signals are picking up momentum and equity markets are surging. From a risk-off environment, the world is moving to a risk-on environment. Gold’s haven status has thus suffered.

From a monetary policy perspective, continued talks of tapering of asset purchase or quantitative easing in the US affect the sentiment in the gold market.

After all, gold’s dream run for ten long years and particularly for four years since 2008 was helped by humungous amounts of liquidity in the global economy, generated by various forms of stimulus packages and steep reduction in interest rates.

The outlook for dollar which is negatively correlated with gold price is positive. The greenback is expected to firm up in the coming week to 1.32 to a euro.

Tapering will further boost the dollar. This will surely pressure gold prices . The geopolitical situation too is currently not as unstable as it was months ago.

Bearish asian demand

And lastly, it is by now common knowledge that from a fundamental perspective, the outlook for gold is bearish.

Physical demand in India, the world’s largest import market, is subdued even during the current period of strong seasonal demand.

Import and marketing restrictions imposed by the government have stymied gold sales.

In China, the volumes traded on the Shanghai Gold Exchange have not gained momentum, although there is expectation that demand for the Chinese New Year early 2014 may kick in.

When all these gold-negative factors are put together the only scenario that emerges is that almost every driver of gold prices has weakened. The metal’s attractiveness has waned. For too long has the metal had a dream run driven by fickle investor demand and ‘loose money policy’. Prices risk a fall below $1,200/oz and towards $1,100-1,150 levels in the not too distant future.

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