Gold Hasn't Lost Shine For Some: Why ETF Holdings Aren't the Whole Story

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The gold market really appears to be in a mess.

As widely reported in the media, the gold price plummeted during April, sparked by fears of an early exit or the tapering of the Fed’s quantitative easing program and then multiplied many-fold by the herd instinct, as speculative holders saw a price crash in the making and all rushed for the exit.

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Prices have since recovered about half of the mid-month fall to around $1,468/oz, but are still way down on the start-of-the-year level of $1,700/oz. Comex speculative positions underline the lack of enthusiasm among investors – Standard Bank reports in a note to investors that net speculative length fell 72.0 tons.

Underlying moves were particularly bearish, with 32.5 tons unwound from long positions last week (slightly lower than the 35.8 tons shed the preceding week), and a disconcerting 39.5 tons added to speculative shorts.

The bank observed that the futures market was not convinced that gold could sustain its upward momentum.

Turning to exchange traded funds (ETFs), arguably more of a medium-term investors’ product, another large drop was witnessed in total gold holdings last week (59.0 tons), marking the 11th straight week of liquidation. Over these eleven weeks, a total of 342.7 tons have been sold off, and the bank says there appears to be no let-up in sight.

And yet Reuters reports that physical gold demand in Asia is unprecedentedly strong. The report states physical gold stocks held at CME Group‘s Comex warehouses in New York have dropped to a near-five-year low as falling prices have promoted investors to buy bars and coins. US gold stocks, comprised of 100-troy-ounce COMEX gold bars, have fallen almost 30% since February.

Withdrawals, though, are not uniform among the CME’s five approved storage facilities – JPMorgan, HSBC, Scotia Mocatta, Brinks and Manfra, and Tordella and Brooks. JPMorgan has seen its holdings fall from 586,769 ounces to 163,802 ounces during April, while HSBC’s actually rose 40,000 ounces last week, but are still down some 200,000 ounces from earlier in the month.

HSBC and Scotia Mocatta hold a combined 80% of the CME’s total gold stocks against JP Morgan’s 11%, but nevertheless, physical gold deliveries appear to be across all the approved facilities and the destination is not domestic consumption, but re-melting and casting to specifications acceptable in Asia.

Indeed, the trend since last year seems to be for both private and futures market gold stocks to be heading for export to new vaults and precious metal investment products in Asia. Whether this trend will have any ramifications outside the gold market remains to be seen, but the fall in the gold prices appears to have, if anything, accelerated the process rather than caused buyers to step back.

This physical demand may be making up for the lack of ETF demand and speculative interest supporting the price and contributing to the bounce-back. Whether it is enough to push the price higher is unclear yet, but it does underline that for many in the emerging world, gold has not lost its shine.

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