Gold ETFs share decreases despite rally

July 1, 2014 05:11 AM

The rising value of gold this year hasn’t translated into more buyers.

As prices rose 10 percent since the end of December, the best start to a year since 2010, investors pulled $562 million through June 27 from U.S. exchange-traded funds backed by precious metals, extending a holdings slump that began in early 2013, data compiled by Bloomberg show. That compares with a $47.6 billion inflow for equity funds in the first six months as the MSCI All-Country World Index of shares rose 4.9 percent.

While gold’s appeal as a haven has gotten a boost amid tensions in Ukraine and Iraq, the gains will be temporary, according to Barclays Plc and Goldman Sachs Group Inc. Prices tumbled 28 percent last year, the most since 1981, as investors lost faith in the metal as a store of value. The U.S. economy is forecast to rebound from an unexpected contraction in the first quarter, and the Federal Reserve is easing stimulus measures as domestic inflation remains in check.

“Gold is pretty much unloved because investors seem to be mesmerized by other assets,” Michael Gayed, the chief investment strategist who helps manage $220 million at Pension Partners LLC in New York, said in a telephone interview. “Many have failed to notice the fact that gold has shown a strong performance this year, and it seems that the 2013 slump is still fresh in people’s minds.”

Fund outflows

Investors removed about $143 million from precious-metals funds last month though June 27, the third straight decline that capped an outflow of $1.34 billion for the second quarter, data compiled by Bloomberg show. At the same time, gold futures rose 3 percent since the end of March, after climbing 6.8 percent in the previous three months, posting the longest run of quarterly advances since 2011.

“Gold’s recent gains are unlikely to last over the longer term,” Barclays said yesterday in a report. “If and when geopolitical tensions ease, we continue to expect gold to return to its downward trajectory.”

Prices will average $1,250 an ounce in the third quarter, about 5.9 percent less than now, according to the median of 15 estimates. Futures for August delivery traded at $1,328.50 at 9:45 a.m. on the Comex in New York after rising to $1,334.90, the highest for a most-active contract since March 24.

Slowing demand

After a surge in physical purchases earlier this year in Asia, demand is slowing globally. Shipments into India, the biggest user after China, probably plunged 77 percent in the first half, according to the All India Gems & Jewellery Trade Federation.

Sales of American Eagle gold coins by the U.S. Mint totaled 266,000 ounces this year, 58 percent less than in the first six months of last year and the lowest for the period since 2008, data on its website show. BullionVault’s Gold Investor Index fell last month to 51.2, the lowest since February 2010, the London-based company said today. Readings greater than 50 signal more buyers than sellers.

Bullion climbed 70 percent from December 2008 to June 2011 as the Fed bought debt and held borrowing costs near zero percent to spur economic growth after the recession. Prices ended the 12-year bull run last year as inflation remained low and on concern that the U.S. central bank would slow the pace of monetary stimulus.

While the Fed said June 18 it sees interest rates staying low after it ends bond buying, the bank trimmed purchases for a fifth consecutive meeting, to $35 billion. Rising home and equity prices and an improving global economy should help stoke above-trend growth in the U.S., Fed Chair Janet Yellen told reporters that day.

Economic data

The metal may get another boost if the economy falters or geopolitical tensions escalate, said Jeff Sica, who helps manage $1 billion at Sica Wealth Management in Morristown, New Jersey. “Going ahead, economic data will guide gold prices,” he said.

Gold prices are down 31 percent from an all-time high of $1,923.70 reached in September 2011. Holdings in global ETPs backed by the metal declined more than 47 metric tons this year, after slumping 869 tons in 2013, capping six straight quarters of declines, data compiled by Bloomberg show.

While investors are shunning gold, they’re buying ETPs backed by equities, which added $27 billion in June through June 27 and $44.8 billion in the second quarter, the data compiled by Bloomberg show. The Standard & Poor’s 500 Index of shares is up 6.1 percent this year, touching a record on June 24, while the MSCI All-Country World Index advanced for five straight months.

“The equity market continues to attract money as people expect that the economy will improve further,” Scott Gardner, who helps manage $450 million at Verdmont Capital SA in Panama City, said in a telephone interview. “Gold has risen this year, but it seems that some investors don’t expect the gains to stick.”

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