Gold: Big picture unchanged

Long gold holders were taken for a wild ride over the past couple of weeks, enduring one of the largest one day selloffs in history on April 15 as panic gripped the market. By the end of the rout, gold had fallen more than 15% peak-to-trough in just three trading sessions, bottoming out at $1,321.50 (basis June futures), a level not seen since fall 2010. Gold has since rallied smartly (Chart 1), retracing more than $150 of the selloff. What are you to make of such a move?

The selloff in gold has sparked what can best be described as a new gold-rush, as investor clamor to buy physical gold. Evidence of the strong physical demand can be seen in the premiums investors have been willing to pay above market value for access to bullion. Prior to the yellow metal’s “flash crash,” wholesalers in Dubai were paying about 50 cents above the London cash price, and are now paying premiums of between $6 and $9 an ounce. In Istanbul, one of the largest gold trading hubs, premiums have reached as high as $25 per ounce. In China, volumes on the Shanghai Gold Exchange set a new record high last week, and countries from the U.S. to Australia have reported feverish buying of gold coins, causing shortages.

The strong investor demand has not been mirrored in gold ETFs, where we’ve observed a significant decline in the number of ounces held in trust. Since December of last year, total known ETF holdings of gold have declined by about 13%, the largest and most protracted decline since the advent of physically-backed precious metals ETFs.

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