Gold funds see unprecedented 31% slump as world loses faith

'More selling' expected

Investors are dumping gold-backed exchange-traded products at the fastest pace since the securities were created a decade ago, mirroring the steepest price drop in 32 years.

Holdings in the 14 biggest ETPs plunged 31 percent to 1,813.7 metric tons since the start of January, the first annual decrease since the funds started trading in 2003, data compiled by Bloomberg show. The removals erased $69.5 billion in the value of the assets as prices fell by the most since 1981. A further 311 tons will be withdrawn next year, according to the median of 11 analyst estimates compiled by Bloomberg.

ETP investments reached a record $148 billion last year, helping sustain the bull market that drove a more than sixfold increase in prices since 2001 by offering a way to own bullion without needing to store it. The slump shows some investors losing faith in gold as a preserver of wealth after inflation failed to accelerate and the Federal Reserve signaled it may curb stimulus. John Paulson, the biggest investor in the largest ETP, said last month he doesn’t plan to buy more.

“All the bullish factors we had pushing gold higher in the last 12 years are now going into reverse,” said Robin Bhar, a London-based analyst at Societe Generale SA who’s ranked by Bloomberg as the most-accurate precious-metals forecaster over the past eight quarters. “There will be more ETF selling in 2014 as the price goes lower.”

Bear Market

Gold for immediate delivery fell into a bear market, defined as a drop of 20 percent or more, in April and traded at $1,236.52 an ounce at 8:21 a.m. in Singapore, down 36 percent from the September 2011 record of $1,921.15. Only corn and silver fell more this year among the 24 commodities tracked by the Standard & Poor’s GSCI Spot Index, which slipped 3.6 percent. The MSCI All-Country World Index advanced 15 percent and the Bloomberg Treasury Bond Index lost 2.8 percent.

Goldman Sachs Group Inc. called bullion a “slam-dunk” sell in October and said it was among the bank’s most bearish commodity forecasts for next year. Bullion may average $1,216 in 2014, the least since 2009, according to the median of 14 analyst forecasts compiled by Bloomberg. Hedge funds and other large speculators were the least-bullish since June 2007 in the week to Dec. 3, Commodity Futures Trading Commission data show.

ETP sales of more than 800 tons since the start of January, including by billionaire George Soros, exceeded total purchases in the previous three years. Paulson & Co. cut its holdings in the SPDR Gold Trust, the biggest ETP, by half in the second quarter, while Soros and Third Point LLC’s Daniel Loeb sold their entire stakes.

Inflation Hedge

Investors see less need for “disaster insurance,” Fed Chairman Ben S. Bernanke told U.S. lawmakers on July 18. Traditionally, investors turn to gold in times of turmoil as an alternative store of wealth to equities and the dollar and as an inflation hedge. Until 2003, most held gold bars, coins or jewelry in vaults or bought futures and options.

The introduction of gold-backed ETPs, which trade like equities, gave access to the metal without the need for arranging storage or dealing in derivatives. One futures contract traded on the Comex bourse in New York, equal to 100 ounces, costs $123,460 while a share in the SPDR Gold Trust, representing 0.1 ounce, is valued at $119.38.

ETPs backed by gold were created by Graham Tuckwell, a Canberra, Australia-born entrepreneur who persuaded the producer-funded World Gold Council to back the proposal after the Australian Gold Council rejected his plan in 2002. The products are cheaper and more transparent than mutual funds, Tuckwell said in an interview with Bloomberg News last year.

Gold Jewelry

Tuckwell’s ETF Securities Ltd. oversees the second-largest gold-backed ETP, according to data compiled by Bloomberg. Zuercher Kantonalbank, Switzerland’s biggest state-owned regional bank, and BlackRock Inc., the world’s leading money manager, are the next-largest operators.

“Gold ETPs are preferred by a lot of people because at the end of the day it’s easier to trade and easier to manage your portfolio,” said Francisco Blanch, the head of commodities research at Bank of America Corp. in New York. “And it’s probably cheaper. If you buy physical bars, you have the cost of the bar, but you also may have to pay for storage of the physical bar. The ETP does all of that for you.”

Asian Jewelry

In Asia, where many buy jewelry as a form of investment, the cost to consumers is higher. At a store of SK Jewellery Pte Ltd. in central Singapore, a gram of 99.9 percent purity, cost S$62.50 ($50) on Dec. 11. That’s equivalent to about $1,555 an ounce, 24 percent more than the London spot price that day. A 1- ounce coin at United Overseas Bank Ltd., Southeast Asia’s third- largest lender, was on sale for S$1,640 an ounce ($1,310) the same day, according to its website.

Some of the economic conditions that prompted investors to buy gold over the past few years no longer exist. The U.S. unemployment rate that touched a 26-year high of 10 percent in October 2009 after a recession in the world’s largest economy dropped last month to a five-year low of 7 percent, the government reported Dec. 6. The U.S. economy grew at an annual rate of 3.6 percent in the third quarter, the strongest in 18 months. Inflation in the U.S. is running at a 1 percent annual rate, half the pace of the past decade.

“Inflationary pressures are not strong,” said Peter Richardson, the Melbourne-based chief metals economist at Morgan Stanley. “We’re certainly not buyers” of gold, he said.

The Standard & Poor’s 500 Index rose 25 percent this year, heading for the biggest annual gain since 2003. The SPDR S&P 500 ETF Trust is now valued at $164.5 billion, compared with $33 billion for the SPDR Gold Trust.

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