Fundamentals for Gold Unchanged as Economic Uncertainty Rises


With fear and volatility gripping the financial world, many investors find it puzzling that gold — history’s most trusted safe-haven asset — has yet to rebound. Following the Fed’s taper pump-fake and President Obama’s appointment of Janet Yellen as the next Federal Reserve chair, the ingredients for higher gold prices are in place. What seems to be missing is positive investor sentiment.

In past musings, we have examined the Eastern world’s burning love affair with bullion by pointing to record-setting imports and sky-high premiums for physical product. The story is a little different in the West, where widespread skepticism has kept a lid on gold.

Gold ETF Outflows Slowing: A Signal of Change in Investor Sentiment?

As most of you are probably aware, 2013 has not exactly been a year that gold funds will want to remember. SPDR Gold Shares (NYSEARCA:GLD) and the iShares Gold Trust (NYSE:IAU) are both down nearly 25 percent for the year. Along with the rest of the gold ETF bunch, GLD and IAU have bled assets profusely. Both funds rank among the top 10 worst-performing ETFs in terms of outflows. With that said, there are positive signs that the worst of the selling may be behind us.

According to ETF Securities, net outflows for gold ETFs slowed to $4.2 billion last quarter after redemptions hit $19.6 billion during the second quarter. Gold ETF holdings now stand at roughly 29 million ounces, which is on par with 2010 levels but well off the 43 million ounces held by gold funds at the end of 2012.

Does this significant slowdown in outflows mean that the weight of negative investor sentiment is lifting, bringing brighter days ahead for gold? Oliver Ludwig, managing editor of IndexUniverse, says it’s too early to tell, as the wide swings in ETF outflows over the past two quarters indicate high levels of general uncertainty. On the other hand, Adam Koos, president of Libertas Wealth Management Group, is encouraged by the recent consolidation and possible bottoming of gold ETFs.

Others are less optimistic that outflows will dry up any time soon, although not for the reasons you’re probably thinking. According to Brien Lundin, president and CEO of Jefferson Financial, gold is fleeing ETFs and heading east as part of the ongoing evolution in the global marketplace. That being said, Lundin doesn’t see ETF redemptions as necessarily being supportive or negative for gold from the perspective of supply and demand.

Although the mainstream financial media would have you believe otherwise, gold ETFs represent but one component of global demand. Nonetheless, the paper gold market, which also includes gold futures, remains highly influential in establishing the spot price and thus shaping public perception. Ultimately, however, the fundamentals will win out, and there is little reason to think that gold will not flourish when the consequences of burgeoning debt levels and reckless currency debasement can no longer be kept at bay.

Originally written for the website of the Hard Assets Alliance, an industry association of trusted economic and investment research firms that fosters a better understanding of prevailing economic trends and offers investing advice. Open a SmartMetals investing account from Hard Assets Alliance here.

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