What are gold fund outflows really saying?

The FT reported last week that because investor inflows into gold exchange-traded funds have recently stagnated, many analysts have begun questioning if the decade-long rally for the gold market might be nearing exhaustion.

As the FT noted:

Holdings in gold ETFs have dropped 16 tonnes (0.7 per cent) this year to 2,244 tonnes by the end of June, according to data from the Royal Bank of Scotland.

RBS also highlighted a significant shift in positioning in the gold futures market with a 17 per cent drop in the net long position (bets on further price gains) held by speculators on the Comex exchange in New York in the latest data (week ending June 28).

A theory that certainly makes logical sense.

Though, not to all.

Andrew Maguire, the famed “silver short” whistleblower, is interpreting the dynamics very differently indeed.

In an interview with King World News, he told the broadcaster that the flows could actually be indicative of something else. The pull of physical gold out of western exchanges and into Asia.

As he explained:

“Lots of people say, well look at the SLV, look at the GLD – look at how people are capitulating. Look how the gold and silver market is being sold off. Wrong. Think about it this way. If you want to buy cheap gold and silver, what do you do? You simply look for any above ground stores, i.e. SLV or GLD and you go and buy 50,000 shares of SLV , for example, and then you literally redeem them for a Comex price. Where else can you get above ground silver or discounted paper prices in size? A lot of analysts have been saying “look how negative this is” when in fact it’s the exact opposite. That metal is moving into some very strong hands and disappearing into vaults in the eastern hemisphere.”

He specifically notes the importance of the soon to be opened Pan Asia gold exchange, an Agricultural Bank of China venture.

The physical-backed exchange plans, among other things, to offer bullion contracts priced in Chinese renminbi. The RMB contracts will also be available to international investors, as agreed by the State Administration of Foreign Exchange (SAFE), and contribute to a new Beijing gold FIX price.

In Maguire’s opinion, this could make all the difference when it comes to demand — especially if it was properly factored into forecasts by analysts.

As he notes:

Just look at the scale of this to get an idea of how massive this game-changer will be, The Agricultural Bank of China has over 320 million retail customers and 2.7 million corporate customers and has integrated its customer account information system with this platform.

By creating the first ever rolling spot contract, Chinese bank customers will for the first time have ease of access to 10 ounce gold contracts in Renminbi directly from their bank accounts and with the click of a mouse.

To give a further idea of scale, if just 1% of their customers bought a single 10 ounce contract, that would equate to 1,000 tons of physical gold being drawn down….

Unnerving stuff indeed.

But, then again, is all this just a promotional exercise for Maguire? Perhaps the reason most analysts are ignoring the exchange’s launch is because the idea of it making a real difference to the demand story is actually barking.

We have to say we’re not so sure. For one thing, using physically-backed ETFs to get your hands on physical gold and silver is not a bad strategy at all. It’s also one that most analysts don’t really consider since outflows driven by direct client redemption requests are not differentiated from outflows generated by arbitrage motivated market-maker redemptions.

There’s also the Asian demand factor to consider too. As Standard Chartered — who are bullish gold — pointed out on Monday, Asian demand has exerted a powerful influence on gold prices for as long as 30 years. China and India collectively account for more than 50 per cent of global demand, and if the current relationship persists gold prices could reach $4,869 per ounce by 2020 in their opinion.

In which case why shouldn’t a new China-based exchange make a difference?

Meanwhile, if any of the related links below are anything to go by, the idea that retail demand for gold is lapsing is, well… hard to rationalise.

Related links
Gold to go: The vending machine which dispenses precious metal – Guardian
Swiss Parliament to discuss gold franc
- Market Watch
Comex Alternative: Pan Asia Gold Exchange – YoutTube

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