Investors who trade gold might benefit from knowing about the sharp drop that the holdings of gold-backed exchange-traded products have experienced so far this year, and how these changes could illustrate the deteriorating sentiment surrounding the precious metal.
The sharp outflows that these investment vehicles have suffered in 2013 have been illustrated by major global asset manager BlackRock data, which revealed that during the first 11 months of the year, $36.4 billion worth of the metal was taken out of these ETPs, according to Reuters.
The major global asset manager was not alone in providing information indicating liquidation in such investment vehicles, as Bloomberg data revealed that so far in 2013, the 14 largest gold-backed ETPs experienced a 31 percent drop in their holdings. At the current rate, these investment vehicles are on track to experience their first annual loss in the assets they hold since 2003.
In addition to these recent sharp drops, analysts taking part in a recent Bloomberg poll provided a median prediction that next year, these gold-backed ETPs will lose another 311 metric tons of the precious metal.
These liquidations have been happening during a year when gold has been suffering from sharp depreciation. The precious metal plunged into a bear market in April, and then proceeded to fall below $1,200 an ounce in June. The commodity fell to its lowest value in close to three years during that month, and started recovering around that time.
The lackluster performance that gold has experienced lately represents a sharp contrast to the 70 percent surge in value that bullion experienced between the end of 2008 and June 2011, according to Bloomberg. This rally happened at a time when the Federal Reserve was making an effort to stimulate the economy through the use of low interest rates and also bond purchases that went on for several years.
While this period was very bullish for the metal, the tides may have turned. Earlier this year, as gold dropped sharply in price, many market experts openly bemoaned their loss of faith in the commodity. It was noted by many that the precious metal did not perform well when European nation Cyprus was in turmoil, and that this situation helped illustrate that gold is no longer the safe haven that it once was.
In addition, various macroeconomic factors could contribute to the commodity experiencing further declines in the future, according to Reuters. Those who trade gold might find themselves less likely to purchase the precious metal if the economy continues to improve.
“The outlook for gold ETPs is going to depend very much on the macroeconomic environment in 2014 and currently the almost unanimous consensus expectation is continued strong recovery of the U.S. economy, higher interest rates yields and a strong dollar,” Nicholas Brooks, head of investment strategy at ETF Securities, told the media outlet. “On that basis, it is unlikely that the gold price will perform very well and if the gold price does not perform well there is not going to be strong demand for gold ETPs.”
Another major factor that could easily help to push gold lower is the tapering of the Federal Reserve’s quantitative easing, an event which has been anticipated for some time. The financial institution has been purchasing securities for several years with the objective of bolstering the money supply and stimulating the economy. Since 2012, the central bank has been buying $85 billion worth of debt-based financial instruments every month.
“From our prospective, the first few months of 2014 will be still very much shaded by this fear of tapering and the impact that it will have on financial investor behavior and the potential to see further selling out of the [exchange-traded funds],” Catherine Raw, portfolio manager for BlackRock, told the news source.
Another factor that could potentially motivate a greater number of those who trade gold to shun the precious metal is the robust performance that stocks have been enjoying, according to Bloomberg. So far in 2013, the S&P 500 Index, a benchmark group of stocks, has surged 25 percent. At this rate, it will enjoy its sharpest annual gain since 2003. The S&P has risen more than 150 percent since reaching a recent low in March 2009.
“Equities continue to be the only game in town,” Jeff Sica, who works in Morristown, New Jersey as the president of Sica Wealth Management, told Bloomberg. “Why would you want to hold gold and see the value depreciate when you can buy equities and see your money grow?”
Individuals who want to trade gold may benefit from keeping in mind the sharp outflows that ETPs backed by the metal have experienced thus far in 2013, as well as the robust depreciation that the commodity has experienced this year.
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