Gold ETF demand in 2011 lowest since 2005

In the Lead: “Captain [Credit] Crunch ”

Precious metals – with the exception of palladium – opened mildly higher this morning in New York as players awaited US GDP and consumer sentiment data with a degree of caution and as profit-takers stood by to possibly pull the trigger on certain assets following recent spikes. Spot gold started the final session of the week $3.50 higher at $1,724 per ounce while spot silver climbed 20 cents to $33.65 on the bid-side.

Support levels in the yellow metal are at $1,707 and at $1,691 while overhead resistance looms at $1,736 and $1,744 per ounce. In silver, the barriers to overcome on the upside remain neat $34 per ounce. Platinum advanced $14 to touch $1,619 the ounce but palladium appeared stalled with a $2 loss near $688 per ounce. The next upside resistance points in platinum and in palladium are thought to reside at the $1,650 and at the $699 levels, respectively. Rhodium was still ahead by $25 following yesterday’s climb to $1,425.

Despite the hefty two-day rally in gold, the analytical team at CPM Group New York believes that we are possibly in for a short-lived spike in the precious metal. Kitco News notes that they are maintaining their view that gold prices will still decline over the next few quarters. “Beyond the start of February gold prices are expected to decline, possibly moving toward $1,700 over the first two weeks of the month,” they said, adding that prices should move between $1,500 and $1,760 through February.

They point out that open interest in the Comex gold futures has fallen over the past few days, suggesting short-covering – which is the buying back of previously sold positions to close a trade – drove prices higher. In the physical market, they said the premiums on gold Eagles and gold Maple leaf coins have fallen, “suggesting that smaller investors have been selling gold coins back to dealers during this rally, more than buying new coins.”

Analysts at Standard Bank (SA) – albeit not showing too much concern about the development just yet – note that “For the first time since mid-November 2011, our Standard Bank Physical Gold Flow Index moved into negative territory yesterday — this indicates that physical market participants have turned net sellers [recent scrap sales from Southeast Asia have risen]. This lack of physical demand partly explains the inability of gold to make a sustained move beyond the $1,730 level.”

Although not covered in the CPM advisory, the fact that physical gold ETF demand has fallen quite sharply since the heady offtake days of 2009 should not go unnoticed by overeager, inflation-fearing individual investors. Gold ETF demand totaled 617 tonnes in 2009, it then fell to 338 tonnes in 2010 and it subsequently dipped to only 171 tonnes last year. That total tonnage is less than the demand levels seen in 2007 (253 t), 2006 (260 t), and 2005 (208 t) and it represents the lowest figure of annual demand from the ETF niche since the very creation of these investment vehicles. Ironically, the decline in 2011 took place during the most intense stages of the European crisis and amid a growing threat of a global one.

Speaking of physical demand, the weak rupee contributed to India’s importing of only 125 tonnes of the yellow metal in the fourth quarter of 2011 – less than half of the previously anticipated 281 tonnes by the World Gold Council. India’s love for gold may in fact have been the prime factor in weakening the nation’s currency and widening its trade gap. $23 billion worth of gold imports into that country in the period 2008-2011may have been responsible for one third of the 1.3% rise in India’s current account deficit, according to analysis conducted by Aussie investment bank Macquarie Capital.

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