European and U.S. investors have exited their gold positions in specialist exchange-traded funds at record levels this year, just as Asian consumers flock to the metal to absorb cheap tonnage flowing east, according to the latest World Gold Council quarterly report from Thursday.
Outflows from ETFs reached almost 700 metric tons by the end of September, an unprecedented level since such gold funds gained popularity in 2004. The world’s largest gold ETFs are based in Europe and the U.S., with the U.S. SPDR GLD shares holding 868 metric tons in trust as of Monday morning.
That reflected selling by tactical Western gold investors, said the council’s latest gold demand report. The world’s top 14 gold ETFs hit a year-to-date low of 60 million ounces in holdings as of Nov. 5, according to a HSBC Holdings Plc (LON:HSBA) research note from Tuesday.
Still, consumer gold demand for the year to date has set a new record, at 2,896 tons demanded so far. That nearly matches demand for all of 2012, which reached over 3,100 tons, in this year’s first three quarters.
“It shows this bifurcation in the market that we’ve got this this year, of ETF redemptions on the one hand, but record consumer demand on the other hand,” council managing director Marcus Grubb told International Business Times.
Grubb added that the final quarter of the year is traditionally a strong season for gold buying among Chinese, in the leadup to February’s Lunar New Year. China has been gold’s strongest source of support this year, after Indian investors suffered from import-related shortages and Western investors feared Federal Reserve tapering.
“China is going a long way in absorbing the ETF tonnages and also making up for the weakness in the Indian market,” Grubb told IBTimes. Chinese demand has outpaced Indian demand for the first nine months of the year for the first time ever, according to the new data, and China is almost certain to become the world’s top gold consumer for this year.
Still, gold demand by value for the third quarter fell 37 percent from a year ago, and is now worth only $37 billion globally. That’s the lowest quarterly point since the first quarter of 2010, though much of that decrease is driven by gold’s precipitous 20 percent price plunge earlier this year.
The third quarter also saw the first sequential dip in physical demand for the summer and fall months since 2007. That’s partly because price plunges in April and June triggered bargain buying by Asian investors, who bought in the second quarter instead of the third.
Gold supplies fell slightly, by 3 percent, as the sixth straight quarter of gold recycling declines was partly offset by higher mine production. People tend to recycle their gold if gold prices are high.
With the significant flow of gold from west to east this year, as the UK posted a tenfold increase in gold exports to Switzerland for refining, some observers see a potential supply crunch in the future.
Since Chinese consumers tend to sell gold in extreme circumstances of political volatility or danger, it could be hard for the hoard of gold now in Chinese hands to make its way back to the U.S. and Europe quickly, said Morgan Gold strategist and gold bull Edmund Moy.
“When gold flows east, when it goes to individual investors, that becomes family wealth that passed down to the family,” Moy told IBTimes on Tuesday. “It’s unlikely that those individual investors will sell gold unless the markup is incredibly high.”
“If U.S. demand and European demand begin to tick up, there’s going to be a supply crunch, because that gold is not going from east to west,” added Moy. “If inflation starts to tick up, and U.S. investors want to buy a lot of gold quickly, there’s not going to be a lot of gold, quickly, to buy.”
Moy also cited stagnant supply outputs from gold miners, who are struggling with high capital and production costs.
Turkey, the world’s biggest gold coin market, also saw explosive growth, with more than 120 percent yearly growth in demand for bars and coins. Turkish investment demand hit 92.8 tons by the end of September, more than any annual Turkish total since the council began tracking global gold demand.
Gold suffered its largest one-day fall in more than a month last Friday, after better-than-expected U.S. jobs data. The precious metal opened at $1,265 per ounce in New York on Wednesday.
“Gold’s fragile floor is being tested. The much stronger-than-expected U.S. non-farm payrolls, combined with the surprise rate cut in Europe, exerted downward pressure on gold, with prices testing three-week lows,” wrote Barclays PLC (LON:BARC) analysts on Monday.
“In the absence of support from a solid cushion, additional stronger-than-expected macro data are set to expose gold to further weakness,” read the note.
Barclays analysts forecast a price of $1,325 per ounce for the last quarter of 2013, higher than $1,180 lows reached in June. Others predicted that gold could fall below $1,050 per ounce next year.
Note: Photo by Shutterstock.com.