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Today’s gold market is being defined by two trends: aggressive selling by investors in North America through exchange-traded funds, and aggressive buying by consumers in Asia. But for now, the ETF investors are overwhelming everyone else.
Gold prices settled below US$1,390 an ounce on Thursday, and after five rough trading days in a row, they are approaching the lows that were reached during last month’s dramatic collapse.
Amid that turmoil, the World Gold Council (WGC) issued a report that shines a light on how rapidly investors are dumping their holdings.
The report shows that overall gold demand fell 13% in the first quarter of 2013 compared to the same period a year ago. While that is not too bad on the surface, investment demand fell an astounding 49%. Investors sold a net 176.9 tonnes of gold through ETFs in the quarter, or roughly US$9.3-billion worth of the yellow metal.
The gold market is very small, with total demand of about 1,000 tonnes per quarter, according to the council. That means fluctuations in ETF holdings can have an outsized effect on the paper price.
“When the hedge funds and other investment funds turn negative, it just overwhelms the physical demand,” said George Topping, an analyst at Stifel Nicolaus.
Given that April was the most volatile month for gold since 2008, investment demand could wind up being even worse in the current quarter.
The ETF sell-off masked the fact that underlying physical gold demand has been strong. And in the case of China and India, it has been remarkably strong.
The WGC reported that Chinese consumer demand rose 20% in the first quarter, while Indian demand rose 27%. It is proof that Asian customers and investors are eager to jump into the market in search of a bargain whenever prices decline. That has been an ongoing theme throughout the gold bull market.
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