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As gold and ETFs briefly diverged, a subtle shift?
Reuters
Posted: Fri, 20 Mar 2009
[miningmx.com] -- FOR the past year, investment in the world's largest gold-backed exchange-traded fund has risen hand-in-hand with spot prices, sometimes lagging, sometimes leading, but always giving a boost to market sentiment.
But late last week and early this week, when net investment into the the SPDR Gold Trust resumed its rise after a three-week hiatus, spot gold prices stalled, as the wider bullion market appeared to pay little notice to a further 4 percent rise in the volume of gold held in reserve by the SPDR.
While that correlation has returned with a vengeance over the past two days after the U.S. Federal Reserve's decision to plough another $1 trillion into the economy ignited inflation concerns, renewing buying and driving up prices, some analysts say the brief breakdown may have signalled a subtle change.
"There will be a correlation as long as SPDR
holdings are rising because the fund is gold itself, but it has become less clear that the fund's rises will lead to a big gain in the market," said Yuichi Ikemizu, Tokyo branch manager at Standard Bank Plc.
Part of the reason is that more than ever, physical demand from ETF investors -- who collectively now hold more gold than the Swiss central bank -- is being met by a surge in supplies of scrap gold sold by retailers and everyday people looking to capitalise on gold's 140 percent rise over the past four years.
But it also highlights the potential for divergent views between investors who put money into the SPDR -- a security that is as accessible to retail and other investors as any company share -- versus COMEX futures or the inter-bank bullion market, restricted to major players and institutions.
"The volumes into the ETF will sometimes drive market sentiment from an inter-bank perspective as well," said Darren Heathcote of Investec Australia. "But
(a few days ago) there wasn't the confidence to take on longs."
Instead, he said, other factors took precedence, including signs of a recovery on equity markets and a renewed decline in the U.S. dollar, which gathered pace from Wednesday.
"When we go through a period of low activity in things like the ETFs, the market does tend to focus on other areas. Sometimes it's hard to drag it's focus away."
Some analysts say it raises questions about the focus on ETF investment as an indicator of the broader market, which also includes heavy trade of futures and physical bars.
"Risk-taking behaviour is different for SPDR and the spot market. Spot players take the risk by buying and selling, and a volatile spot market is advantageous for SPDR which is stable given the nature of its investors," said Shuji Sugata, a manager in Mitsubishi Corp Futures and Securities' research team.
STEADY GAINS, FEW LOSSES
SPDR has generally stayed
on an uptrend since its debut in 2004, but the broad appeal to a wide spectrum of the investment community from mom-and-pop investors to pension funds, means volume is unlikely to fall sharply.
After hitting an 11-month high above $1,000 on Feb. 20, spot gold fell back below $900 earlier this month for the first time in a month, and has now rebounded to above $960 an ounce.
SPDR holdings surged 300 tonnes, or nearly 40 percent, in the past five months since financial markets tumbled on a deepening banking crisis, playing a big role in pushing up spot gold prices while other commodities remained slack.
During that rise, prices and inflows clearly moved in sync: from Jan. 14 to Jan. 31, spot gold rose 14 percent and ETF holdings rose 6.7 percent; from Feb. 9 to Feb. 21, spot gold rose more than 11 percent, while ETF holdings surged 17 percent.
The link was similar in September when risk aversion surged as the credit crisis exploded.
The
relationship has traditionally been poor at times of falling prices -- after each of those surges, spot gold has fallen, often precipitously, while investors held tight.
But this week's divergence appears to be the first instance in which spot prices have flatlined or fallen while ETF holdings rise.
"What has happened is that while speculative money left the spot market, long-term investment continued to enter SPDR," said Tatsufumi Okoshi, a senior economist in the commodities research at Nomura Securities.
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