Bullish Signal: Equities Rally Sparks Record Gold Fund Sell Off

March 7, 2013 at 09:29


ETFs, which accumulate physical gold and then issue shares, have become one of the most popular ways to invest in bullion since they were first launched a decade ago.

By providing investors with an easy and cheap way of trading the metal, they have helped to spur a wave of gold buying that pushed its price up more than sevenfold to a record $1,920 a troy ounce in 2011.

But as the gold price slid to less than $1,600 amid signs of a global economic recovery, investors have begun to sell their shares in gold funds.
ETFs dumped 106 tonnes of bullion in February, the largest monthly outflow on record according to data. Since the start of January, gold ETF holdings have fallen 140 tonnes.

“There’s a very clear rotation out of more defensive assets,” said Nicholas Brooks, head of research at ETF Securities, which launched the world’s first physical gold ETF in 2003. “Investors believe the US and Chinese economies are picking up, and so they are shifting.”

Equities have surged since the start of the year. On Tuesday the Dow Jones Industrial Average, a popular index of US stocks, surpassed its previous record high, set in 2007.

Some of the world’s highest profile investors have participated in the sell-off. Regulatory filings show that funds run by George Soros and Louis Bacon sold down their gold ETF holdings in the final months of last year.
The sell-off has caused consternation in the gold market because ETF investors have traditionally kept faith even in periods of falling gold prices.

Moreover, ETFs collectively hold more gold than all but a handful of central banks, meaning that a sudden rush to sell could have a significant impact on prices. Analysts and traders are divided about whether the selling will continue.

While some see it as a blip, a growing contingent argues that it could mark the beginning of the end for the bull run in gold.

“It’s not a dramatic reversal yet, but I think it hints at what we may see going forward, with more outflows than inflows,” said Damien Courvalin, commodities analyst at Goldman Sachs in New York.

“If you get this self-fulfilling decline in holdings, with people losing confidence and unwinding, it might exacerbate the decline in prices.”