Trying To Estimate Impact Of ETF Sell-Off

One of the fears of gold bulls, and talking points of gold bears, is what would happen to the metal if gold ETFs started dumping their holdings onto the market. With approximately 2,100 tonnes of gold in their possession, they dumping would have the impact of a big IMF sale - more so, given that the IMF sells for reasons of its own and ETF holders would sell en masse because they expect the metal to tumble.

Analysts are actually divided. Some, like Jon Nadler, believe the gold market will cave in as a result. Others, like Juan Carlos Artigas, believe that the gold market could absorb those sales.

Artigas, investment manager at the World Gold Council, which developed the SPDR fund, says ETFs account for only about 8 per cent of gold demand. The biggest share of gold demand currently is jewellery, with about a 50-per-cent share, followed by bar and coin demand at about 25 per cent.

The gold market “is a very deep and liquid market,” Mr. Artigas says. He said the ETFs don’t lead to artificial distortions in prices due to their buying and selling activity because even without them, investors who wanted exposure to gold would find ways to be in the market anyway. The ETFs are “just another way to access the market,” he said.

The much-feared IMF sales, because they took place in a bull market, only had the effect of temporarily blocking gold's rise; they actually were absorbed by the market after some indigestion.

Where a person stands on this issue depends upon their opinion about why the ETFs would unload. If investors turn away from ETFs as part of a general selling wave of gold, then their sales will take a sustained chunk out of the market. If for other reasons, though, then the gold is likely to be absorbed by other sources of demand. The most that can be said is, ETF sales would exacerbate an already-existing bear market - but not cause one.