Gold pivoting around $1,600 on low volume

In the Lead: “Going with the Flow”

The trading environment remained thin and bereft of much energy as the abbreviated market week reopened for business in New York this morning. Overnight, gold breached the pivotal $1,600 mark once again and fell to lows near $1,590 despite a slightly weaker US dollar and despite a hefty advance in copper and a mild rise in crude oil values. Options expiry and year-end profit-booking elicited light but steady selling from market participants and the pressure was manifest in all but platinum prices this morning.

Spot gold traded about $10 on either side of the $1,600 level while silver continued to orbit about 30 cents on either side of the $29 mark per ounce. Platinum advanced $12 to rise to the $1,437 bid-side quote while palladium fell $1 to $658 per ounce. No changes were reported in rhodium at $1,350 bid the ounce. The US dollar was down about one-tenth of a percent and was trading slightly under the pivotal 80 figure on the trade-weighted index.

The euro showed sluggish trading patterns but managed to remain above the critical $1.30 level and above recent 11-month lows so far. The greenback has refused to croak in 2011, much to the chagrin of its numerous morticians who have been promising its demise since, oh, forever. Reality check: currency players have actually augmented the levels of their bullish dollar bets. The CFTC reports that net long dollar positions reached $17.63 billion in the week ending on December 20th.

At the same time, investors siphoned off some $490 million from the commodities’ space. Gold and other precious metals outflows have totaled $1.59 billion while non-precious metals commodities saw net inflows of more than $1 billion. Speaking of the flows end ebbs of money and of gold, here is a situation that ought to be worth pondering as we head for year-end tally time in various assets. It pertains to gold ETF accumulation patterns (the lack thereof, to be more precise).

The epic rise in gold prices has certainly been boosted to a significant degree by the advent and subsequent gold-accumulative behavior of gold exchange-traded funds. Some have calculated the “after-burner” effect of gold ETFs to have amounted to perhaps as much as $400 in the value of gold since 2005 (with another, similar-sized booster rocket effect coming from gold mining firms de-hedging over the past decade).

It now turns out that, despite heavy PR and positively spun ETF stories that were in heavy rotation all year long in 2011, the numerical reality is at odds with such propaganda. To wit: inflows of gold into ETFs have more than halved in the current year. Whereas nearly ten million ounce of the yellow metal flowed into such vehicles in 2010 (307+ tonnes), the tally for 2011 shows only 135 tonnes going into warehouses catering to them (this, according to Canada’s Financial Post).

A combination of “temptations” from other assets (see: stocks and the dollar) and gold’s rising volatility (not to mention record price) have made such inflows become much more “moderate.

Now, we are told, “investor interest seems to be maturing” in the gold ETF niche. “Maturing” in this case means that the surfeit of 1200-1700 tonnes currently extant in the gold market will have to be mopped up by sources as yet unknown- lest the gold market clears at a substantially lower price paradigm. In other words, the dependency on ETF gold absorption by the market was worrisome to begin with. Now, it is scary.

More than 100 tonnes per month –not per annum- would need to now flow into such instruments in order to make a good dent into the market’s projected surplus. As things stand right now, the SPDR gold exchange-traded fund (GLD) is on track to record an annual 2011 outflow of more than 400.000 ounces of gold. There was a time when (Q2 of 2010) accumulation and demand was visible and robust enough to touch such levels.

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