'Live by the ETF - Die by the ETF'
I think a wise man once said that.
For the convenience of the bugs- I've bolded all the lies you've been told about gold.
- you'll thank me later.
Investors Flee Gold ETF as Metal Loses Luster
Thursday May 24, 7:01 am ET
BySimon Constable, TheStreet.com Staff Reporter
biz.yahoo.com
For years, investors have been hoarding gold as a hedge against inflation and the weakening dollar -- gold coins, bars of gold and, more recently, a new crop of gold mutual funds and ETFs. Now there are signs the yellow metal may be losing its luster.
Over the past month or so, streetTracks Gold Shares, by far the biggest exchange-traded vehicle that follows gold prices, shed 31 tons of its holdings of bullion. The total inventory now stands at 469 tons, down from a high of almost 501 tons on April 17.
Gold Shares is one of only two ETF-like products in the U.S. that holds physical bullion -- in other words, bars of gold. Each share represents one-tenth of an ounce. (The other, iShares Comex Gold Trust, has only 46 tons.) The rest of the U.S.-listed ETFs that track movements in gold markets hold stocks in mining companies or futures contracts.
There have been several days when investors have cashed out more bullion, in the form of Gold Shares, than central banks commonly move in a week.
This massive divestment comes as the price of gold is at its highest average levels in history, recently selling for about $658 an ounce, compared with a first quarter average of $650 an ounce. By comparison, in 1980, the year gold fleetingly spiked to a daily all-time high of $825, the price averaged only $612.
And the mighty greenback is as weak as ever. Over the past five years, it has lost about a third of its value against the euro.
Gold Shares isn't the only thing investors are shunning. Earlier this month, the World Gold Council reported a 26% drop in the tonnage of gold purchased by investors during the first quarter compared with the year-earlier period. WGC tracks purchases of gold bars and coins, which account for roughly 28% of global demand. Another 63% or so is used to make jewelry, with the rest going toward industrial uses such as electronics and dental implants.
More recently, the U.S. Mint reports that dealers have only purchased 3,000 ounces of gold coins so far in May. That compares with 36,500 ounces for the whole of May 2006. April wasn't much better, with sales of 11,000 compared with 27,000 a year earlier.
Whether investors are feeling better about the economy or are simply sated, the falloff in demand has big implications. That's because investment demand is a key factor in sustaining gold prices. Unlike other investments, gold doesn't yield anything or pay dividends. So many investors buy it based on recent price momentum.
"Investment has been key to rising prices and it will continue to be the key," says Carlos Sanchez, a gold analyst at New York-based specialty consulting firm CPM Group. He explains that investors, rather than speculators, tend to buy bullion for the long term and, as such, take gold off the market.
According to data from CPM, there has only been one year since the 1970s when investors liquidated more gold than they acquired. The numbers also point to a strong correlation between rising prices and investment buying.
Demand for jewelry, on the other hand, is inversely related to prices. People tend to buy more when gold prices fall, making it more affordable.
So what's happening? It seems that at least some of the time-honored reasons for buying gold are being undermined.
"You've a global economy that's roaring; that's undermining the traditional factors such as a declining dollar behind moving assets into gold," says Joe Brusuelas, chief U.S. economist at IDEAglobal in New York. This lowers the chances the Federal Reserve will cut interest rates, which means the dollar will likely hold its own against other currencies from here on out.
Another driver of demand for gold is the fear of inflation, which undermines the value of assets that pay a fixed rate of return. But recently, the core rate of inflation -- which excludes food and energy -- has been subdued, and it doesn't look like it's headed higher any time soon. Lakshman Achuthan, managing director at the Manhattan-based Economic Cycle Research Institute, says its future inflation gauge recently hit a two-year low.
There may also be psychological factors at work. So far this year, the price of gold has approached $700 an ounce three times, only to pull back.
It remains to be seen whether the price of gold is headed into reverse or merely awaits a much-needed catalyst. But in the meantime, it pays to keep a close eye on how investors are behaving.
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Ron |
