Today’s gold market is being defined by two trends: aggressive selling by investors in North America through exchange-traded funds, and aggressive buying by consumers in Asia.
Billionaire investor George Soros joined Northern Trust Corp. and BlackRock Inc. in cutting holdings of exchange-traded products backed by gold before a bear market in prices last month, while John Paulson maintained a stake that lost about US$165 million in the first quarter.
But for now, the ETF investors are overwhelming everyone else.
Gold prices settled below US$1,390 an ounce on Thursday, and after five rough trading days in a row, they are approaching the lows that were reached during last month’s dramatic collapse.
Amid that turmoil, the World Gold Council (WGC) issued a report that shines a light on how rapidly investors are dumping their holdings.
The report shows that overall gold demand fell 13% in the first quarter of 2013 compared to the same period a year ago. While that is not too bad on the surface, investment demand fell an astounding 49%. Investors sold a net 176.9 tonnes of gold through ETFs in the quarter, or roughly US$9.3-billion worth of the yellow metal.
The gold market is very small, with total demand of about 1,000 tonnes per quarter, according to the council. That means fluctuations in ETF holdings can have an outsized effect on the paper price.
“When the hedge funds and other investment funds turn negative, it just overwhelms the physical demand,” said George Topping, an analyst at Stifel Nicolaus.
Given that April was the most volatile month for gold since 2008, investment demand could wind up being even worse in the current quarter.
The ETF sell-off masked the fact that underlying physical gold demand has been strong. And in the case of China and India, it has been remarkably strong.
The WGC reported that Chinese consumer demand rose 20% in the first quarter, while Indian demand rose 27%. It is proof that Asian customers and investors are eager to jump into the market in search of a bargain whenever prices decline. That has been an ongoing theme throughout the gold bull market
Dhiraj Singh/BloombergA salesman counts gold chains at the Dwarkadas Chandumal Jewelers store in the Zaveri Bazaar area of Mumbai, India, on Monday, May 13, 2013.
In particular, Chinese gold imports have been going through the roof. Data released last week showed that China imported 223.5 tonnes (or 7.9 million ounces) from Hong Kong in March, crushing the previous monthly record of 114.3 tonnes that was set last December. Gold bugs have repeatedly pointed to these figures as evidence that underlying demand in strong, regardless of the price movements on the Comex.
Physical demand has been solid in other countries as well. In the U.S., the council said that demand for bars and coins rose 40% in the first quarter, while jewellery demand increased for the first time since 2005. Global jewellery demand reached a record 551 tonnes, or US$28.9-billion.
Central banks also added 109 tonnes of gold in the quarter, the ninth straight quarter in which they boosted their reserves.
“Overall, diverse gold demand across both sectors and geography remains strong and is likely to stay strong in the future,” Marcus Grubb, the council’s managing director of investment, said in a presentation.
But even if physical demand can be counted on to create a price floor when the investment funds sell, no one is certain what that floor is. Experts said that the next technical support level for gold is about US$1,300, but it broke through support levels last month when it plunged 13% in two days.
If prices fall to the US$1,200 range and stay there for an extended period, analysts have warned that gold miners will be forced into major restructurings of their operations, including mine closures. They are already slashing their capital spending budgets to preserve their balance sheets.