Chart Of The Week: Gold ETF Holdings Plummet, Raising Fears Of A Vicious Cycle

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February 25, 2013
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Investors are fleeing gold ETFs at a startling pace.

 

Gold ETF Holdings

 

After hitting a record 84.6 million ounces at the start of the year, holdings of gold in exchange-traded funds have plummeted by 2.3 million. When it comes to ETF holdings, the classic question of the chicken and the egg arises. Was it the decline in gold prices that spurred the drop-off in holdings or the decline in holdings that spurred the drop in gold prices?

In our view, it’s a little bit of both. Investors in gold ETFs are only one segment of the vast gold market, but an increasingly important part. Last year, demand from these investors was almost 9 million ounces (279 metric tons), which represented 6 percent of total worldwide demand for gold.

That’s not insignificant. A reversal of those investment flows, where we see a 9-million-ounce decline in holdings, could conceivably do a lot of damage to the gold price. And as prices decline, more ETF investors could be compelled to sell—a vicious cycle.

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