Gold demand seen leaving ETFs for futures, real metal

Gold Tunes Out Weak ETF Buying as Speculation Soars

By Jan Harvey, Reuters

LONDON — Gold prices are ignoring dwindling inflows into bullion-backed exchange-traded funds, with prices supported as investors switch their interest to the U.S. futures market and outright purchases of physical metal.

Investors are increasingly embracing riskier assets like stocks, leaving less of an impulse to hoard gold as a hedge against the unknown, lending support to its appeal as a buffer to dollar weakness and future inflation.

Consequently, while interest in gold-backed ETFs has tailed off after unprecedented buying in the first quarter, other forms of investment, such as positioning on the New York Comex futures exchange, have increased and underpinned a firm price.

Spot gold has held firm above the $900 marker since early May, with the psychologically key $1,000 level in reach.

“The slack created by slower ETF demand hasn’t gone away completely, it’s just been replaced by more speculative interest,” said Barclays Capital analyst Suki Cooper. “The position on Comex has picked up quite sharply.”

Flows into gold ETFs hit a historic peak in the first quarter of 2009 as investors spooked by instability in wider markets went after physical gold as a safe store of value.

A combination of heavy selling of equities and very high credit risk made ETFs all the more attractive. But while equities are now bouncing from low levels, analysts say credit risk has fallen dramatically, denting inflows.

Almost 15 million ounces or some 450 tonnes flowed into the six gold-backed ETFs monitored by Reuters in the first quarter, worth more than $13 billion at the time. But as the financial markets started to stabilize, appetite for the funds slackened.

In the second quarter, inflows dwindled to less than a million ounces, with two of the largest ETFs monitored — New York’s SPDR Gold Trust and London-based Gold Bullion Securities — registering small declines.

With the gold market still a relatively small arena where a few big players can have a disproportionate effect, it has not taken too much movement for overall ETF flows to dry up.

“Investing in ETFs is still a minority sport, and I guess maybe some of the funds investing think there are better options in other commodities, and even equities, due to a return to risk appetite,” said Matthew Turner, an analyst at VM Group.

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