Ten days of pessimism flared into gold’s worst rout since 1980 this week, with selling so strong it knocked the world’s third-biggest exchange-traded fund further below its asset value than any time in a year.
While shares of the SPDR Gold Trust fell 14% since the start of April, the contraction in its market value was six percentage points more as investors bailed out of shares during the decline. Selling pressure on April 15 sent the ETF more than 3% below the fund’s net asset value, the biggest discount since February 2012, according to data compiled by Bloomberg.
Investors whose purchases more than doubled the fund’s capitalization since 2008 were just as eager to sell amid signs of weakening economic growth in China and liquidation by central banks. The SPDR Gold Trust, which balances supply and demand by creating and redeeming shares, has pulled more stock from the market this year than ever before.
“You had a bunch of things hit simultaneously that caused all those twitching investors to pull the trigger,” said Michael Cuggino, who manages more than $15 billion at Permanent Portfolio Family of Funds Inc. in San Francisco. “It’s affecting the gold market because that ETF no longer needs that gold to support that share count and it’s being unloaded into the marketplace.”
A tumble that had erased 2.2% of the gold ETF this month through April 11 snowballed as growth in China weakened, Goldman Sachs Group Inc. recommended selling the metal and speculation increased that the U.S. Federal Reserve will taper off its bond buying program.
Gold futures on the Comex in New York lost 4.7% last week and plunged 9.3% to $1,361.10 an ounce on April 15, the biggest drop since 1980. While bullion rebounded 1.9% yesterday, it is still down 27% from a record close of $1,891.90 in August 2011. Gold for June delivery fell 0.1% to $1,386 at 12:31 p.m. New York time today, while the gold ETF advanced 0.9% to $134.02.
The plunge last week widened the discount of the gold ETF to the value of its holdings to 3.1%, the biggest in 14 months, data compiled by Bloomberg show. Only eight times before has the gap, which opens up when the shares keep falling after gold prices are fixed in London, been more than 3%.
“The tradability of the ETF relative to trading gold in the spot market does make these price shocks more pronounced,” Paul Baiocchi, a senior ETF specialist at San Francisco-based research firm IndexUniverse LLC, said by phone. “It’s a fair point to say that the ETFs have had some impact on gold prices. What that is and to what extent remains in question.”