As could be expected, the decreasing gold price has caused people to run away from gold investments and not only did the gold miners drop faster than expected, any decrease in the gold price usually also caused people to liquidate their holdings in the Exchange Traded Funds which are trying to provide an easy and liquid possibility for ‘the common man’ to invest in gold.
And indeed, the SPDR Gold Trust ETF (GLD) saw an outflow of almost 29 tonnes of gold (roughly 925,000 ounces) during the month of October. As of at the end of last month, the ETF only held 741 tonnes of gold (a little bit less than 24 million ounces) which is the lowest point in six years time. So even though the net long position in the gold futures is still positive, it looks like the smaller investors have spit out gold as an investment, and that’s exactly something we like to see when we are waiting for the ‘total capitulation’ phase.
Apart from the discussion whether or not the ETF effectively holds all of its gold in physical form, the outflow was real and it looks like the gold which was dumped by the ETF was immediately flown over to Hong Kong (after a short re-melting layover in Switzerland). According to more recent data, China has imported more than 68 tonnes of physical gold in earlier this month and India was also stepping up its gold buying efforts as it acquired 100 tonnes of the yellow metal.
[8]
Total ETF Outflows Source [9]
So it’s almost guaranteed that these two Asian countries are extremely happy with the Gold ETF dumping its position as it allows them to get their hands on even more physical gold without upsetting the normal market circumstances (Asia is now practically just absorbing the selling pressure from the Western countries, which is the smartest thing to do, because if China and India would have been as aggressive when gold isn’t in a glut, it might have disrupted the normal market).
This could lead to a very interesting ‘problem’ when the retail investors are looking to get back in gold. Now the Asians are absorbing all the selling pressure, but the problem is that Asia obviously won’t stop buying gold when (yes, ‘when’, not ‘if’) the price goes up again. This means that instead of a net compensating move, there will be two larger buyers of the yellow metal as both Asian demand and ETF demand will dramatically increase the net demand for gold. Should the investment appetite for gold increase again to the levels of 2012, the Gold Trust would have to repurchase 612 tonnes of physical (!) gold, which is roughly 20 million ounces.
So we could be gearing up to see a perfect storm. At this point the Asian demand is high enough to compensate for all the ETF outflows, but the moment those Exchange Traded Funds will once again see a net inflow, they will have to compete with the Asian demand for physical gold as both will be scrambling to get their hands on those nice shiny gold bars.
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