IN THE NEWS

By Cliona O'Dowd, Eureka Report

Gold’s rollercoaster ride since April has the market spooked. But, for small investors keen to hold physical gold, the lure of the precious metal is proving too tempting to resist.

Since gold futures prices plunged over $US200 a troy ounce in the space of two days in April, exchange-traded funds (ETFs) around the globe, including Australian-listed ETF Securities, have recorded massive outflows. At the same time, many small investors have pounced on the yellow metal to buy bullion, coins and jewellery, seemingly ignoring the market’s bearish sentiment and emphasising the growing disconnect between the paper gold market and the physical gold market.

Following gold’s dramatic flash crash, it has managed to claw some of its way back, recovering about half the value it lost mid-April. For small investors, it was an opportunity too good to miss. A surge in demand for gold bars and coins, and the increasingly higher premiums investors are willing to pay for physical gold, illustrates the unquenchable thirst consumers have for the precious metal.

But the action in the market tells a completely different story. ETFs are bleeding holdings at an astounding rate, with traders taking an increasingly bearish stance on the precious metal. The world’s largest gold-backed ETF, SPDR Gold Trust, saw record outflows of almost $US12 billion in April, or 143 tonnes. The outflows have continued into May and show no signs of abating. ETF Securities, which listed the world’s first physical gold ETF on the ASX in 2003, saw global outflows of $US323 million in the week before last, the largest weekly outflow in three and a half years. Danny Laidler, head of ETF Securities Australia and New Zealand, says that most of the selling has been by short-term tactical traders, with long-term investors continuing to hold onto the commodity.

Even before the April sell-off, gold ETF holdings were in a state of decline. Since December, total ETF holdings of gold are estimated to have dropped 13% in the biggest, most prolonged fall since their introduction 10 years ago. ETF Securities has seen global net outflows of $US1.4 billion year-to-date. In Australia, the net outflow year-to-date from ASX-listed GOLD has been a relatively modest $US18 million

At the same time, demand for physical gold from India and China shows no sign of slowing. Chinese imports of gold account for almost 20% of total annual demand. This compares with less than 3% 10 years ago. The trend for increased gold consumption in China is reflected in the first quarter data, rising 26% in the three months to March, to 320.54 tonnes. Gold flowing from Hong Kong to China has increased sharply, surging to 223.52 tonnes in March from 97.11 tonnes in February. The previous monthly record of 114.37 tonnes, reached in December, pales in comparison. Similarly, demand has jumped in India, the world’s number one gold consumer ahead of the country’s wedding season and Akshaya Tritiya festival starting this month.

China and India are without doubt the biggest buyers of physical gold right now, but in the West, demand for gold bars and coins has also surged. The US Mint recorded a 118% rise in demand for one of its gold coins in April, forcing it to suspend sales for a time. Back at home, it’s a similar story. Even before the April price drop, the Perth Mint had experienced a taste of consumers’ growing appetite for gold. In the first three months of the year, demand for gold coins jumped an impressive 49%. But the April figures illustrate that the consumer love affair with the yellow metal is far from over. Last month the mint recorded a 160% rise in gold coin sales and a 74% rise in gold bar sales. Combined bar and gold sales for the month beat all previous records, the Mint said.

What we’re seeing looks to be a growing disconnect between the physical gold market and the paper gold market, with small investors leading the rush to buy “the real thing”, increasingly at a premium to the paper price, despite the market remaining bearish on the yellow metal.

Essentially, the game has changed, in the short term at least. The speculators have taken a step back to reassess the prospects for gold, while small investors have been moving in, buying up physical gold as the attraction of holding a safe haven asset outside the banking system increases.

In the near term, there has been much speculation over the direction the gold price will take. Senior analyst at Thomson Reuters GFMS, Cameron Alexander, expects the gold price to rise back up toward the $US1,700-mark this year, in what he deems to be the yellow metal’s “last hurrah”, before the bullion spot price declines next year and the year after.

At the same time, the fundamental reasons for holding gold haven’t really changed. The Euro zone is still in crisis, the currency wars are heating up, the US recovery is still fragile and global economic growth remains agonisingly slow.

The many critics of gold argue that it has no real value because it doesn’t have the potential to deliver any income, like dividends from stocks or rental yields from property. But it nonetheless offers a hedge against inflation and currency devaluation, and is the go-to investment in times of financial uncertainty.

Historically it has a negative correlation to other investments, including stocks. In a diversified investment portfolio, gold certainly has a role to play. For investors seeking further diversification, a small exposure to gold, say, up to 5% still makes sense for long-term investors.

This article was first published in Eureka Report.

For more articles visit http://www.eurekareport.com.au

RESEARCH AND ANALYSIS

Thomson Reuters GFMS said Thursday that it looks for gold to climb back to the mid-$1,800s before the end of the year (reports Allen Sykora of Kitco News).

If so, the consultancy said, this would mean yet another higher annual average price of gold, continuing what is already an 11-year run. However, the firm also said it looks for an improved macroeconomic backdrop to eventually trigger a bear market.

Thomson Reuters GFMS released its forecast while launching its Gold Survey 2013 at events in London and Johannesburg.

The report said that U.S. developments will remain a key factor driving gold price movements over the course of 2013. While improving but still patchy economic data contributed to a softening of the gold price in recent months, the consultancy said it feels this is already is already priced into the market. Meanwhile, there is a continued lack of confidence that ongoing debate over budget cuts and raising the debt ceiling will result in a satisfactory and timely resolution.

“Gold is likely to remain very sensitive to U.S. monetary policy, and even though we’ve had some hawkish noise from some within the Fed, it’s difficult to see a material unwinding of the QE (quantitative easing) program until well into 2014 and so that should continue to underpin the gold price in 2013,” said Neil Meader, head of precious metals research and forecasts at Thomson Reuters GFMS.

The report also expects ongoing support for gold from developments in Europe. Much of the continent’s economic outlook is largely priced into the market, but there “remains significant potential for gold-friendly shocks,” as reflected by a price uptick in mid-March as the financial crisis unfolded in Cyprus, the consultancy said.

Other supportive factors cited include a continued low interest-rate environment and some investors’ fears over the potential for inflation to become resurgent.

However, Thomson Reuters GFMS did offer caution for further into the future. “There’s arguably clearer light at the end of the tunnel in that we can perceive a return to something more like normality for the macro-economic backdrop, and that could easily entail the start of a secular bear market, perhaps in late 2013 or more probably in 2014,” Meader said.

Read the full story on Kitco News.

IN THE NEWS

A British investor who believes that Western nations live in “a frenzy of debt and consumerism” has revealed what originally inspired him to start investing in gold.

“I learnt about gold 50 years ago from a novel called The Razor’s Edge by Somerset Maugham,” Ian Dunbar said.

The novel tells how a group of wealthy Americans got wiped out by the Wall Street Crash - except one who “saw the crash coming, sold up and bought gold,” the Scottish doctor said.

Full story: This Is Money

Gold futures in New York rallied 1 per cent on Friday snapping a three day a three-day losing streak. But the metal declined 0.5% on the week.

Silver rose 81 cents, or 3% on the day, finishing 1.1% ahead for the week.

In the wake of last week’s disappointing announcements by the US Fed and ECB, analysts at Commerzbank said gold’s moderate decline was a sign of relative strength.  

“Fears about the financial system, the geopolitical risks, the low and in some cases negative real interest rates, coupled with a ‘currency war’ and continued interest on the part of investors and central banks, create a positive environment for gold’s traditional role as capital protection,” they said.

Full story: MarketWatch

IN THE NEWS

Gold has been steadily falling in a 'descending triangle'.

Discussed today on the Sydney Morning Herald website, this type of pattern is formed when a series of lower highs emerge while the lows hold steady.

Mark Umansky, of the Australian Technical Analysts Association, says in the report that the appearance of this pattern in a longer term uptrend can suggest a powerful reversal pattern may emerge.

However, a dramatic downturn is not the only possible outcome. Click here for gold’s high and low predicted by this type of analysis.

On Seeking Alpha, Tim Iacono says when the gold price converges in an ever-narrowing trading range, it’s “a development that is usually followed by a breakout in one direction or the other.”

It’s likely to happen “sometime in the next month or so”, he says, citing possible catalyst events in August. Click here for more.

Overnight in New York, gold futures settled down US$5.40 to US$1577.40 an ounce. Silver was down 26 cents to US$27.04 an ounce.

IN THE NEWS

Gold sold off Wednesday after Federal Reserve Chairman Ben Bernanke failed to hint at new stimulus measures despite recent signs of a U.S. economic slowdown.

"While easing may be expected, investors are still saddled with the uncertainty of not knowing exactly when such an order will be given," Edward Meir, metals analyst at INTL FCStone told Reuters.

Analysts at GoldCore underlined their belief that QE3 remained inevitable. They said “gold may also receive safe haven buying from the LIBOR (London Interbank Offered Rate) scandal,” the deepening rate rigging crisis afflicting the banking sector. Read the full story here.

Gold futures in New York settled down US$18.70 to US$1570.80 an ounce. Silver futures dropped 0.8 per cent to US$27.095 an ounce.

WHAT OTHERS ARE THINKING

GoldCore explains the factors behind the recent fall in the gold price.

"There are few a factors that have led to gold falling in price in recent weeks despite the worsening Eurozone debt crisis and deteriorating economic data from the US and elsewhere.

Gold Has Fallen Due To:

• Gold’s recent weakness is in large part due to a period of recent dollar strength. While gold in dollar terms has fallen by 25% ($1,920 to $1,540), gold in euro terms is only down by 14% (from €1,374/oz to €1,210/oz).

• Oil weakness – since the end of February, oil has fallen from $111 a barrel to below $95 a barrel (NYMEX) today. Gold and oil are often correlated and many buy gold to hedge inflation that comes from higher oil prices.

• Gold’s weakness may also have been due to wholesale liquidation in all risk markets due another bout of "risk off" which has seen global equities and commodities all come under pressure.

• Physical demand from retail investors in the western world has slowed down as did demand from India in recent weeks due to the increase in taxes on bullion (since removed).

• Much of the selling has been technical in nature – whereby more speculative elements on the COMEX who trade gold on a proprietary basis have been selling gold due to the recent price weakness and the short term trend clearly being down. This has led to speculative longs now having their smallest positions since December 2008.

Gold’s Outlook Remains Positive Due To:

• Central bank demand remains robust and central banks are set to be net buyers of gold again in 2012.

• Demand for physical gold remains robust in much of the Middle East, Asia and the Far East with strong demand seen in particular in Turkey (for Middle East) and in Hong Kong (for China).

• Continuing zero percent interest policies in major developed economies and negative real interest rates remain the primary driver of the gold market. As long as there are negative real interest rates in the US and in most western economies, gold is likely to continue to rise in value.

• The problems in the Eurozone are far from resolved and the short term panacea policy ‘solutions’ of recent months have almost certainly made matters worse and increased the risk of contagion in the Eurozone whereby periphery nations are forced to revert to national currencies or the euro itself is devalued and debased.

Conclusion:

GoldCore continues to believe that gold may rise to the inflation adjusted high of $2,400/oz in the coming years. Given the risk of contagion and currency devaluations in the Eurozone, euro gold should rise to above €2,000/oz in 2013.

Gold remains an essential diversification and those who have a 10% allocation to gold bullion will be rewarded again in the coming months as macroeconomic, monetary and systemic risk is likely to become elevated again."