Why this year’s gold selloff might actually be a b
Why this year’s gold selloff might actually be a bullish sign
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John Shmuel
Wednesday, Jun. 5, 2013
Gold prices are down more than 17% this year, but some analysts still say the fundamentals are still in place to support higher gold prices this year. Yuya Shino/Reuters
Gold prices have been plunging this year and redemptions have been soaring, but not all analysts are convinced this is the start of a rush out of gold.
Prices for the precious metal are down 17% year-to-date. The big driver behind the move has been speculation that the U.S. Federal Reserve may soon move to ease its bond buying program, depriving gold of the liquidity and inflation fears that have helped propel its stellar rise in the past few years.
It is clear that demand for physical gold in Asia is strong
That, however, doesn’t mean that gold’s 12-year bull run is at an end, says Nana Sangmuah, managing director of research at Clarus Securities Inc.
“We believe that the fundamental drivers of gold remain intact,” Mr. Sangmuah wrote in a report that was co-authored by Jamie Spratt. “Despite the Dow and S&P 500 indices hitting record levels and speculative positions in gold at their lowest level since 2008 with funds flowing out of gold and into U.S. equities, we believe the true economic picture will necessitate continuing stimulus by central banks.”
Yet money has continued to flow out of gold products throughout 2013 despite that outlook. SPDR Gold Shares (GLD) outflows this year have been so large that they’re quickly approaching the record inflows seen in 2009. It’s not surprising given all these bearish movements in gold that some market watchers, such as economist Nouriel Roubini, have made some pretty grim calls for the precious metal. Mr. Roubini said this week he expects gold prices will fall from current levels (hovering around US$1,400 an ounce) to about US$1,000 by 2015.
But Eric Sprott, founder and chairman of Canadian fund manager Sprott Inc., said in a letter on Wednesday that the massive outflows from SPDR shares are due to shortages of physical gold and investors taking advantage of arbitrage opportunities. He points out that while the biggest drops in gold prices occurred in April (for example, the 9% drop on April 15), SPDR redemptions started in the second week of January.
The answer to what is happening here, Mr. Sprott said, lies in Asian demand for gold and a shortage of supply there.
“It is clear that demand for physical gold in Asia is strong and that the price of gold in these markets is well above the ‘Western’ price,” he said, referring to what has become coined the Shanghai premium.
“This creates arbitrage opportunities for market participants that have access to large and cheap quantities of physical gold in the West. The bullion banks happen to be the only ones able to redeem GLD shares for gold, and the GLD, with its 1,000 tonnes of inventory, acts like a large physical gold bank,” Mr. Sprott said.
If that’s correct, then all that money seemingly flowing out of gold is simply a relocation of gold from west to east. Mr. Sprott sees this as a disconnect between the physical gold market and the paper gold market.
“In these conditions, it is not hard to imagine that prior to April 15, the bullion dealers, with their large resources, were tempted to sell large amounts of gold futures in order to lower the spot price and make the arbitrage even more profitable by increasing the spread and sparking a tsunami of buying in Asia,” he said. “To us, this is clearly a bullish signal for gold.”