LAWRIE WILLIAMS: Are GLD withdrawals a threat to the gold price?
So far this year a total of 62 tonnes of gold – worth nearly $US2.6 billion at current prices – has been taken out of the world’s largest gold ETF, SPDR gold shares (GLD), despie a couple of months when gold was added into the ETF. Yesterday there was a withdrawal of 3.2 tonnes, but this may have been ultra short term profit taking as there was a deposit of a similar amount a couple of working days prior and the gold price jumped in between!
Gold followers will recall that a continuing outflow of metal from GLD coincided with the big gold price fall in 2012 and 2013, which could worry gold investors should gold continue to bleed out of GLD. However so far the volumes of outflows are not at that kind of level and seem to be more than being balanced by announced increases in central bank gold holdings. With demand apparently picking up in India and perhaps falling off a little in China, although still at substantial levels, the supply/demand balance seems to be holding up. Increased tensions in the Middle East – in particular with the U.S. seemingly taking an increasingly belligerent stance with Iran – and the prospects of an escalating trade war between the U.S. and China, gold could yet be set fair for a substantial boost in the second half of the year should any of these come to a head. And there are other potential flashpoints out there – particularly if President Trump continues with a policy of utilisation of American military strength, and the imposition of sanctions, against regimes to which he is opposed.
This latter policy could even be imposed on supposed staunch allies. For example the U.S. is strongly opposed to the building of a new natural gas pipeline from Russia to Germany – the disputed NordStream 2 project. German Chancellor, Angela Merkel, seems to be heavily in favour and although there is dissension within the EC over the pipeline’s construction, Merkel says the EC can’t and won’t delay the project. But this could lay European companies involved in the pipeline construction open to possible U.S. sanctions, which President Trump seems keen to use as a persuasive tactic on friend and foe alike. Trying to impose U.S. policy on an ally like Germany as to who it can buy its natural gas from is likely to stir up considerable resentment. Multiply this across other jurisdictions over which the U.S. wishes to exert economic pressure and we will see a build-up of resentment against the U.S. Arguably this is already being demonstrated in countries trying to reduce their reliance on the dollar and their turning to gold as a replacement asset in their forex reserves.
The aggressive U.S. policy on Iran is another case in point. The unilateral cessation of the Iran nuclear deal by the U.S. has not found favour amongst the U.S.’s European allies and the slapping of sanctions on any nation continuing to trade with Iran is yet another economic flashpoint. The U.S. dollar has been the world’s principal reserve currency, backed up by virtually all trade in oil being conducted in U.S. dollars. However this is beginning to be eroded and will likely accelerate as time goes on. The law of unintended consequences! All this could be beneficial to gold as a direct, or indirect substitute for the dollar’s role.
So to come back to the question posed in the title, we don’t think so. We suspect withdrawals from GLD, and from other gold ETFs, will diminish and probably reverse as the year progresses. The general consensus is that the gold price is due for a sustained rise in the second half of the year – there seem to be a plethora of geopolitical factors out there which should favour gold and past performance suggests that a rising gold price tends to be accompanied by gold ETF inputs rather than withdrawals. We still think things are aligning positively for gold through the second half of the year – but then gold often confounds. We hope that this time we are correct.
16 May 2019