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.”
Gold ETF
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.”
Asset Flows
Authorities dispute that the ETF, which owns less than 0.01% of all the world’s gold, affect the price of the metal. A study last year from the Securities and Exchange Commission looked at the relationship between spot-metal prices and asset flows for funds backed by commodities including silver, gold, platinum, palladium and copper. The study found no evidence that fund flows are related statistically to price changes, according to a Nov. 6 filing from the SEC.
The SPDR Gold Trust, created by the World Gold Council in November 2004, is the biggest ETF tracking the price of the precious metal, with a market value of $50.6 billion. State Street Corp., based in Boston, is the sales and marketing agent for the fund, which is physically backed by gold bars deposited in a London vault. It’s one of at least three such U.S.-based ETFs. New York-based BlackRock Inc.’s iShares Gold Trust had a market value of almost $8.9 billion on April 16.
New stock in the ETF is created by banks, brokerages and other financial institutions that are authorized to swap the underlying metal for blocks of ETF shares. The mechanism helps the share price stay close to its net-asset value as investors close the gap between the value of fund shares and gold. The process of redeeming shares works in the opposite way, with the broker taking the physical metal for baskets of shares.
Shares Outstanding
Institutions have stepped up redemptions this year as the selloff accelerated. The ETF’s shares outstanding have fallen for the past six days and declined 6.1% to 380.8 million this month, the lowest level since May 2010, based on data compiled by Bloomberg. The ETF hasn’t seen an increase in shares since March 19, according to the data.
“If you see the shares outstanding dramatically being reduced, the takeaway there’s clearly less demand for gold,” Chris Hempstead, director of ETF execution at broker WallachBeth Capital LLC in New York, said by telephone. “What you’ve seen is in an outflow or an exodus of sorts.”
The plunge in gold started on April 2 as the strengthening dollar curbed demand and Societe Generale SA said gold is in a “bubble.” The metal, which has advanced every year since 2000, posted a three-day drop of 3%.
Net Long
Speculators held a net-long gold position of 47,164 contracts in the week ended April 2, down 76% from October, U.S. Commodity Futures Trading Commission data show.
Futures fell 1.8% on April 10, the most in five months, on concern Cyprus will sell the metal. Cypriot authorities committed to sell “the excess amount of gold” owned by the state, yielding an estimated 400 million euros ($522 million), according to a draft of a European Commission report obtained by Bloomberg News.
Concern also grew that the Fed is getting ready to end its program of bond purchases, potentially reducing demand for precious metals as a hedge against inflation. Federal Open Market Committee members “thought that if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and to stop them by year-end,” minutes released on April 10 showed.
‘Really Bad’
“The underpinnings of the gold bull case are really bad,” Brian Barish, president of Denver-based Cambiar Investors LLC, which manages $7 billion, said in an April 15 phone interview. “The big move in gold, almost all of that, was based on a mistaken belief that the Fed’s unconventional monetary programs were going to cause imminent inflation and potential hyperinflation in the U.S. and elsewhere, and nothing like that has happened.”
Goldman Sachs told investors to sell the metal the same day, cutting its 12-month forecast to $1,390 from $1,550. The turn in the gold price cycle is accelerating after a 12-year rally as the recovery in the U.S. economy gains momentum, analysts Damien Courvalin and Jeffrey Currie wrote in an April 10 report.
Gold sank into a bear market two days later, plunging 4.1% on April 12 after U.S. retail sales fell the most in nine months and consumer sentiment unexpectedly declined. Citigroup Inc. predicted in a note that 2013 would be the year that “the death bells ring” for the commodity supercycle.
Record Volume
An unexpected slowdown in China’s economic expansion sparked a commodity selloff that sent gold to the biggest plunge in 33 years on April 15. Trading volume in the SPDR Gold Trust soared to a record 93.8 million shares, according to data compiled by Bloomberg. While it fell to 45.7 million yesterday, it was about four times the average since the 2004 creation and among the 15 largest trading days ever.
“The initial price drop of gold, all of the sudden people became aware,” Tim Ghriskey, chief investment officer of Solaris Asset Management LLC and co-founder of New York-based Solaris Group, which oversees more than $1.5 billion, said in an April 15 phone interview. “Everyone flocked to the exit doors at one time.”
