GOLD
Gold ETP Flows Suffer Largest Monthly Outflow in February…
100 Tonnes 50 0 -50 -100
North America India Other
-150 Jan-11 Jun-11 Nov-11Apr-12Sep-12 Sources: Bloomberg, Barclays Research
is speculation that the US Fed might scale back (or even halt) its asset purchases under QE3 earlier than previously anticipated – and as reflected in the renewed strength of the dollar. The second is that the avoidance of the full effects of
the ‘Fiscal Cliff’ in the US and the easing of tensions in the eurozone, reducing the demand for safe havens in general. The third is that the strong performance of equities has made it harder to make the case for investing in an asset, like gold, which pays no income and whose price has already stalled near record highs. Jessop remains bullish medium term seeing the
current reverse in sentiment as being short-lived. Even if the Fed does trim the size of its asset purchases soon, the US monetary base would still be set to expand rapidly. And other central banks (like the BOE and BOJ) are likely to ease monetary policy further. Global central banks’ stimulus plans, therefore, will continue to provide support in the near term. Jessop and others also believe that the crisis in the
eurozone will probably flare up again later in the year (if not before). Moreover, any increase in volatility in equity markets from the current unusually low levels – especially if caused by a sharp sell-off – should revive safe haven demand. Others agree. As the outlook for growth has improved and investors have rotated away from ‘safe-haven’ assets and towards risk, gold has lost its momentum. However, the view that gold is a store of value should elicit new investment demand as concerns about greater monetary easing, currency debasement and rising inflation expectations put a premium on real assets. “As a result, we believe prices have oversold and are likely due for a rebound,” according to Morgan
26 March 2013 Feb-13 UK Europe Swiss Asia-Pacific
Speculative Shorts A large speculative short position has recently built up in COMEX gold – the largest short position since 1999. “A very large short position is not necessarily a case for gold to move higher again, but it does indicate that it is becoming a crowded trade, in the futures market at least,” according to Walter de Wet, Commodity Strategist with Standard Bank. To him, there are three important questions regarding the large short position: – Firstly, how far can ETP gold liquidation go? Because a large reason for the COMEX speculative short position is likely due to expectations that the gold held by ETPs may not be that ‘sticky’ anymore. – Secondly, what do the underlying fundamental drivers say of gold, and are fears over the stickiness of ETP holdings warranted?
– Thirdly, what about the gold balance sheet, specifically Indian demand and producer de- hedging that has come to a virtual halt?
“The ETP liquidation taking place as the current
short COMEX position is in place is no exception, and not necessarily an outlier — yet,” says de Wet. The second issue is whether the ETP liquidation
is justified, given any change in the underlying fundamental factors that we believe drive gold. For de Wet, the two dominant drivers remain real interest
Global central banks’ stimulus plans, therefore, will continue to provide support in the near term
rates and global liquidity. He doubts that global liquidity is likely to fall in the foreseeable future and real interest rates remain firmly in negative territory. The third issue of concern is the gold balance sheet.
“Here, we have two concerns: physical demand particularly from India and the end of producer de- hedging,” says de Wet. The outlook for physical gold demand remains subdued. The issue of gold producer de-hedging (which has come to a virtual standstill) should be offset by central bank purchases. So as long as central banks remain net buyers (something Standard Bank view as highly likely), the net position between producer de-hedging and central bank buying will remain a favourable component of gold’s balance sheet. Central banks added 534.6 tons to reserves last year (17% more than in 2011) and will be “strong” buyers this year, the World Gold Council estimates.
Stanley who believe this shift towards gold as a store of value against currency debasement and rising inflation expectations may be underway.
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