Gold, silver look vulnerable despite ETF outflows slowing

Unlike in 2013, physically-backed gold ETP holdings have faced much less outflow pressure this year. Against 850 tonnes redeemed last year, some 130 tonnes have flowed out so far this year. Notwithstanding the recent bounce in price, the risk of redemption stays.

Clearly, accumulation in gold holdings happened at various price points starting from as low as $1,000 an ounce.

Gold prices peaked at about $1,900/oz two years ago. As prices fell, increasing amounts of the metal became vulnerable. It is likely that those who entered the market late — purchased at higher prices — sold first in the wake of falling prices. Over the last two years, a significant amount of redemption — estimated at about 1,100 tonnes — took place in the $1,200-1,400 price range. According to experts, the next wave of redemption can happen if prices were to test $1,000/oz where more gold will become vulnerable. Approximately 1,740 tonnes are currently held in various exchange-traded products, nearly 1,000 tonnes lower that holdings early last year.

While gold redemptions are in vogue with falling prices, silver has bucked the trend. Silver holdings are currently estimated at well over 20,000 tonnes and from the beginning of this year, there has been a net addition of close to 600 tonnes under various ETP schemes.

Yet, experts assert that silver holdings look vulnerable because inflows took place at higher prices. With silver currently hovering around $15-16 an ounce at least 1,000 tonnes are expected to become cash-negative.

Liquidation in commodity investment has been an important feature of the market for over a year now. Admittedly, there has been a slowdown in investor flows in recent months. Of late, liquidations of commodity index holdings have accelerated.

What’s driving this wave of liquidation in commodity indices?

As markets price-in weaker demand and growing supply, there has been a steep fall in commodity pries. A dramatic strengthening of the dollar has also proved negative for commodity prices in general. No wonder, funds are moving out as many commodities no longer outperform.