Despite Gold Moving Up, ETF Holdings Shrink In First Quarter Of This Year

ETF holdings of gold have been a major driver in the earlier stages of this bull market, but not in the latest stage. Despite gold going up this quarter, ETF holdings have dropped by about 57 tonnes or about 2.62%.

Gold ETFs monitored by the WGC held 2167.4 tonnes on December 31 2010. This amount fell to 2110.3 tonnes by the end of the quarter.

Earlier this month Philip Klapwijk, chairman of leading precious metals consultant GFMS, suggested that cost savings may account for some of the moves out of ETFs and into physical gold ownership

"Some of this apparent slack in ETFs... is believed to have been taken up by allocated gold accounts, which can incur costs of as little as 0.1% per year," he said. "ETFs typically charge around 0.4% per year in fees for investment management, as well as charging brokerage fees for every transaction made."

This reason gibles with other statistics showing holdings of physical gold rising.

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.

Business Insider Guide To Gold Miner ETFs

This guide contains a list and brief descriptions of what each ETF holds. In order, the six listed are:

1. Market Vectors Gold Miners ETF (GDX). This one's the most popular miner ETF, with 32 producers in its portfolio. Some of them are hybrid companies with major revenues from other metals like copper or silver.
2. Global X Pure Gold Miners ETF (GGGG). Playing off against the GDX, this ETF limits itself to mining companies with 95% or more of their revenues coming from gold production.
3. PowerShares Global Gold and Precious Metals Portfolio (PSAU). Taking the opposite tack from the previous, this ETF holds miners that produce a diversified basket of precious metals.
4. Gold Explorers ETF (GLDX). Typically, the companies in this ETF's holdings don't have any revenue. As its name says, it's devoted to holding a basket of promising gold exploration companies. It holds 28 explorers.
5. Direxion Daily Gold Miners Bear 2x Shares (DUST). An ETF that provided double leverage on the short side for gold miners.
6. Direxion Daily Gold Miners Bull 2x Shares (NUGT). An ETF whose holdings are geared to approximate double leverage on the bull side. This is done by selecting a basket of stocks that have a collective beta of two relative to a basket of all gold miners.

Mystery Drop In ETFs Explained

One mystery surrounding last month's gold rise is why ETF holdings declined while gold was going up. Jason Toussaint, Managing Director for the US and Investment at the World Gold Council, has an explanation: ETF withdrawals in January and February, the large majority of which being from the SPDR Gold Shares Trust, were due to portfolio rebalancings.

"We need to remember that gold had a tremendous return in 2010. It was up 29% and what we were told directly from investors and their trading partners was that many investors took the opportunity to rebalance their portfolios because gold, whilst it may have been a fairly moderate position initially, because of its return relative to other assets, had suddenly become an outsized position," he said.

The other primary reason for the sale, according to Toussaint was a decision by some of the larger institutional investors (which account for roughly 47% of the SPDR holdings) to redeem their GLD shares in favour of holding bullion directly in their own names.

That last reason was interpreted by the World Gold Council as evidence of a broadening and deepening of gold demand. As for individuals, more of them were asking their financial advisors about gold.


Essentially, that's mystery solved. As a result, if this trend continues, the ETF holdings figures will be a little misleading with respect to gold demand.

ETF Holdings Dropping As Lustre Comes Off Gold

As reported by Bloomberg, holdings of ten large gold ETFs is dropping as last year's excitement is turning into this year's excitement over more recovery-oriented sectors.

Assets in gold-backed ETPs fell 31 metric tons yesterday to 2,043.09 tons, the lowest level since Aug. 10, according to data compiled by Bloomberg from 10 providers. That’s the biggest drop in percentage terms since October 2008, the data show. Holdings have shrunk 3.4 percent from the record 2,114.6 tons on Dec. 20....

“Strong economic data has improved confidence about the global outlook and reduced the need to hold gold and silver as a safe haven against credit risk, event risk and currency weakness,” Standard Chartered Plc said in a weekly report dated Jan. 25. “We expect further weakness in both markets.”...

Gold has fallen from its leadership role in commodities for the first time since mid-2009, giving way to cyclical commodities such as oil, Goldman Sachs Group Inc. analyst Jeffrey Currie wrote in a Jan. 24 report. “The U.S. economic recovery has shifted onto a much more solid footing,” he wrote.

The article also notes that inflows were solid last year, but far less than those in 2009. This differential is expanded upon in a Wall Street Journal article excerpting from the World Gold Council's 2010 Investment Digest report.

Inflows into exchange-traded funds and other products backed by gold reached 361 metric tons during 2010, the World Gold Council said. That compares to inflows of 617 metric tons for 2009, the largest on record, it added.

Total holdings reached 2,167 metric tons, worth about $98 billion as of Dec. 31, a new high for holdings, the trade group said.

"This all seems to indicate that ETFs have become a convenient and cost-effective route to access the gold for investors in multiple markets," analysts at the World Gold Council said.

Interestingly, jewelry demand rose 18% despite higher gold prices. Perhaps some of the rise is "because of," which would meant that jewelry and investment demand are blending together.

New Physical ETF To Hold Gold In Asia

There are a lot of gold ETFs now, although the SPDR Gold Shares Trust (GLD) is by far and away the biggest. Nowadays, a new gold ETF has to have a special feature to distinguish it from the pack; Sprott's Physical Gold Trust, which has a limited provision for large shareholders to take delivery of the underlying gold, is an example. The feature that the new Physical Asian Gold Shares ETF has is its gold is to be stored in Singapore.

“The importance of Singapore being a location for custody is that Singapore is often the gateway to Asia and, like Switzerland, is widely considered a neutral country,” Fred Jheon, managing director of product development at ETF Securities, said in a telephone conference before the ETF launching.

The expense ratio of 0.39% is slightly below GLD's, but is far from being the best in the pack. It remains to be seen whether or not the "Singapore advantage" gets people to buy in.