Sunday, 2 March 2014

Gold ETFs: First positive inflow seen in Feb since 2012

Inflows into gold exchange traded funds (ETF) were positive for the first time since 2012 although in a modest way.
Barclays said in a weekly note that 58 Gold ETFs tracked by it had wintessed holdings ise by 4.5 tons so far. It said that stabilisation of flows is likely to offer much better support for gold prices on the downside.

Barclays noted that shorts in SPDR Gold Trust, the largest ETF (NYSE:GLD) now stand at 12.5 mn shares(1.25MOZ),the lowest since March 2012 but last year shorts had risen to 30.8 mn shares (representing 10% of total shares outstanding). More than half of those positions have been covered. In a similar vein, gross short positions in Comex gold have fallen to November lows, and are at around half of their peak set in July last year. Sentiments seems to be improving.

Considering the various price points where shares have been accumulated and redeemed.more than 20% of fresh shares issued had been created at price levels above $1500/oz and given the amount of redemptions in this price range (665 tonnes), there was a large lossmaking overhang of 300 tonnes. Thus last year, as prices tumbled below $1500/oz this indicated further downside pressure as loss-making positions were closed. This of course assumes the minimum level of loss-making positions, ie, those that were bought last at the highest price were redeemed first as prices fell. Whereas if those shares that were created at price lows of between $300-800/oz were redeemed, a much larger negative overhang would exist. Taking a closer look at holdings above the current price range suggests this minimum negative overhang has been eliminated. In fact, the next hurdle holdings would face a large additional loss-making drag at is if prices fall below $1100/oz.

"The third is the weakening correlation between gold ETP flows and equity markets. Last year a negative correlation between the two weighed upon prices but the three-month rolling correlation has moved into neutral territory. However, we expect the negative relationship to return and for better performance across alternative assets to continue to present an opportunity cost for gold," Barclays said.

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