Gold ETF outflows drag on metal as holdings drop to 4-year low

The U.S. Comex gold futures fell 3.46% week-to-Thursday to $1,386.90, just $64 above the worst level reached in mid-April this year. Year-to-date, the gold futures dropped 17.24%, compared to a rise of 15.73% in the S&P 500 Index, 6.48% in the Euro Stoxx 50 index and 12.66% in the MSCI Developed World Index. The Dollar Index is also up 4.79% this year.

Softer Economic News but Higher Stock Prices

While Japan's Q1 real GDP, driven by higher private consumption, jumped a higher-than-expected 3.5%, the Euro-area's April inflation rate dropped to a three-year low to 1.2% while the Q1 real GDP declined 0.2%, its sixth quarter of contraction. The weekly jobless claims in the U.S. increased by 32,000 to 360,000. The Philadelphia Fed index and the New York's manufacturing survey also unexpectedly contracted as the fiscal cuts have taken effect. Nevertheless, about 39% of the stocks in the S&P 500 Index reached their 52-week high according to Bloomberg. The Japanese Nikkei Index is also approaching a five-year high. The strength of the stock markets has surprised many investors who are still under-allocated to equities and are skeptical of the economic future.

Gold-Backed ETP Holdings Continued to Drop

As inflation is low and equity markets are rising, gold-backed ETP investors have been rotating out of gold. The SPDR Gold Trust holdings dropped to a four-year low to 1,041 metric tons yesterday after reports show that investors such as Soros, Northern Trust and BlackRock have cut their holdings between 12% to more than 50% in Q1. Credit Suisse predicted that gold will trade at $1,100 next year, citing that gold is relatively expensive compared to other hard commodities. The World Gold Council reported that while gold-backed ETPs dropped 176.9 tonnes in Q1, total bar and coin demand surged 10 percent from a year ago to 377.7 tonnes while jewellery demand climbed 12 percent to 551 tonnes. Central Banks continued to add gold by over 100 tonnes for the seventh consecutive quarter. The tug of war between the physical buyers and the paper gold investors will likely continue.

What to Watch Next Week

Next week, various U.S. regional Fed Presidents will speak about the economy on May 20, 21 and 23. On May 22, Japan will announce its Target rate, Ben Bernanke will make his testimony and the latest US FOMC minutes will be released. The U.S., Euro-17 and China will release the flash manufacturing PMI index for May on May 23. Germany will report its IFO business climate index on May 24.

About the Author
Austin Kiddle

Austin Kiddle is a director of the London-based gold broker Sharps Pixley Ltd.

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