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LAWRIE WILLIAMS: Watch GLD for gold sentiment and pricing

As we pointed out here a few days ago, the SPDR Gold Shares gold ETF (GLD) has been on a roll so far this year, but last weekend we did at last see a significant outflow for the first time in a couple of months, with a large 8.63 tonne liquidation reported on March 14th.  (See: Tense time for gold bulls).  But, even taking this into account, the amount of gold taken into GLD up until then from the beginning of the year totalled just short of 148 tonnes – a massive amount and equivalent to around 17 days global new mined gold production.  The outflow will have been due to nervousness in the gold market ahead of the FOMC meeting earlier this week, but has since proved to be shortlived.  On March 15th, GLD had added back 2.1 tonnes, on March 16th a further 3 tonnes and yesterday a massive 11.9 tonnes bringing the GLD total holding to 807.09 tonnes – the highest level since mid-July 2014.  If GLD was a country it would have the world’s eighth largest gold reserve – after Switzerland – and is adding to it at the rate of around 60 tonnes a month.

While this level of offtake of physical gold obviously has an effect on the global supply/demand equation – it is equivalent to over 20% of the world’s annual newly mined gold output – there are other perhaps more volatile figures out there, such as Indian and Chinese monthly gold imports, which may have even more of an impact on the supply/demand balance.  But what the GLD figure does indicate is how investor sentiment towards gold in the USA in particular, and the West in general, is changing.

One does not have to go back too far in one’s memory – three to four years to be more precise – to recall that big outflows from the gold ETFs were seen as being major contributors to the big decline in the gold price from its 2011 peak, despite these being at least balanced by increasing gold flows into China in particular.  But with the gold price largely being set by activity in the North American gold futures markets, and this being highly dependent on investor sentiment towards gold, the ETF outflows were almost certainly the prime mover in the gold price collapse.

This year, perhaps the converse has been true so far.  Purchases into the ETFs - the rise this year is in the order of 18.5% - have been paralleled by a 17% rise in the gold price, even though, by all accounts, gold demand has slipped in the two biggest markets, China and India.  With the gold price continuing to be guided primarily by the U.S. COMEX exchange, one should thus keep a close eye on the progress, or otherwise, of gold purchases into, or sales from, GLD.  On the evidence to date, if GLD purchases continue on an upwards path, so likely will the gold price.  Liquidations out of GLD will thus probably indicate another move in sentiment against gold and will likely be paralleled by a gold price fall.

18 Mar 2016 | Categories: Gold

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