Western investors have a finite amount of gold to sell.
Much has been made about the large amounts of selling by gold exchange-traded funds this year. The story is now familiar. As the Federal Reserve and other central banks draw closer to ending their stimulus programs, Western investors have been furiously liquidating their positions, a large part of which is in gold-related ETFs. In turn, prices for the yellow metal are set to register an annual decline for the first time in 13 years.
But just how significant are ETFs in the grand scheme of things? And how significant are Western investors in general? That depends on your perspective. In the short term and on the margin, they can be quite influential. Thus far this year, exchange-traded funds—which are primarily held by Western investors—have seen their aggregate holdings decline by 670 metric tons.
That’s a big swing from the 279 metric ton increase seen during 2012, and it puts ETF holdings well on their way for the first-ever annual decline.
To answer one of the questions posed earlier, in an annual market of roughly 4,400 metric tons, the 950-ton swing in ETF demand is quite significant.
Some might argue that even though holdings have dropped from a record 2,618 metric tons at the end of 2012 to 1,948 tons today, there’s certainly more room for declines.
While that’s true, ETF selling can’t go on indefinitely. There’s a finite amount of gold in ETFs. We’re not going to see selling to the tune of 670-plus metric tons every year. Eventually, ETF holdings will stabilize and cease to be a drag on prices.
That brings us back to the point about perspective. While we’ve established that ETFs have been one of the most significant factors in the gold market this year, for the past decade as a whole, their influence hasn’t been nearly as large.