Gold ETPs – First monthly inflow since 2012
New York (Mar 2) After 13 straight months of hefty net redemptions, February looks set to mark the first month of inflows since 2012, albeit a modest inflow. As we have highlighted, stabilisation of flows is one of the key factors required for prices to find better support on the downside: Barclays Commodities Research.
Gold ETP flows across the 58 products we track were negative every single month for the past 13 months; however, February looks set to post the first monthly inflow since December 2012. After five consecutive days of inflows for the first time since March 2013, provisional data show holdings are up 4.5 tonnes thus far. In our view, a stabilisation of flows is likely to offer much better support for gold prices on the downside. This begs the question have we reached a turning point? Are we about to embark upon a new cushion or is it too soon to expect hefty outflows to subside?
In our view, there are a number of factors that point to stabilisation. The first is the short interest in GLD, the largest physically backed gold ETP. Although the volume of shorts is very small relative to the total exposure in GLD, representing less than 5% of total shares outstanding, the direction of change is telling of market sentiment. Short interest currently sits at 12.5mn shares (1.25Moz), the lowest since March 2012 but last year short interest had risen to 30.8mn shares (and represented 10% of total shares outstanding), just shy of the peak at 31.9mn shares set in July 2011. More than half of those positions have been covered. In a similar vein, gross short positions in Comex gold have fallen to November lows, and are at around half of their peak set in July last year. Sentiment looks to be improving.
The second is the various price points where shares have been accumulated and redeemed. More than 20% of fresh shares issued had been created at price levels above $1500/oz and given the amount of redemptions in this price range (665 tonnes), there was a large lossmaking overhang of 300 tonnes. Thus last year, as prices tumbled below $1500/oz this indicated further downside pressure as loss-making positions were closed. This of course assumes the minimum level of loss-making positions, ie, those that were bought last at the highest price were redeemed first as prices fell. Whereas if those shares that were created at price lows of between $300-800/oz were redeemed, a much larger negative overhang would exist. Taking a closer look at holdings above the current price range suggests this minimum negative overhang has been eliminated. In fact, the next hurdle holdings would face a large additional loss-making drag at is if prices fall below $1100/oz.
The third is the weakening correlation between gold ETP flows and equity markets. Last year a negative correlation between the two weighed upon prices but the three-month rolling correlation has moved into neutral territory. However, we expect the negative relationship to return and for better performance across alternative assets to continue to present an opportunity cost for gold.
Net redemptions were widespread last year, with the bulk of the products, despite region of origin, suffering from net outflows. Most of the outflows materialised in the largest product, GLD, 63% of total outflows, and in turn net redemptions were concentrated in the US primary listed products. The inflows so far in February have materialised in the same region, with GLD up 10.5 tonnes and IAU up 2 tonnes. Interestingly, according to the Bloomberg filing database, asset allocation remains the key reason for ownership of GLD (71%), with ownership type concentrated with investment advisors (just over 70%) followed by hedge fund managers (just over 20%) compared with a year ago implying the share of tactical interest has not shifted despite the hefty redemptions. Thus, from price sensitivity and market sentiment perspectives, ETP holdings are showing signs of stabilising, removing one of the largest negative hurdles that plagued the market last year.
Reduced outflows imply the physical market will not have to work as hard to cushion prices, but demand will need to materialise to set the floor. However, ETPs stabilising alone is not sufficient to drive prices substantially higher. Without the support of the investment community gold prices are likely to struggle to extend their gains. While gross longs have started to build supported by a weaker dollar, weaker-than-expected US data and EM uncertainty in part, broader investment demand is yet to turn a corner. In turn, while the floor for prices may be better supported, in light of our macro view for the dollar to strengthen, tame inflation, firmer US Treasuries and modest growth, gold prices are still set to face headwinds and struggle to retain recent gains, in our view.
Source: Barclays Commodities Research.