Investor inflows in gold exchange traded funds have stagnated this year and speculators have made big reductions in their bets on further price gains, prompting analysts to begin questioning if the decade-long rally for the gold market might be nearing exhaustion.
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).
Daniel Major, precious metals analyst at RBS said that if the reduction in long positions in gold futures by speculators were to become a trend, it would support the bank’s view that the willingness of western financial investors to keep buying gold might be approaching saturation point.
Michael Lewis, commodity strategist at Deutsche Bank, acknowledged that investors were concerned that the rally for gold was starting to run out of steam, given that it had been unable to capitalise on the deepening financial crisis in Europe. With sovereign default risk fears now possibly subsiding and the US government unlikely to pursue a further round of quantitative easing , two of the key forces which drove gold prices higher in the past seemed to be fading.
Mr Lewis, however, said he expected the price of gold to reach a new all-time high supported by real interest rates remaining negative, ongoing weakness in the US dollar and further diversification of foreign exchange reserve holdings by central banks into gold.
Mr Lewis added that attention was likely to become increasingly focused on central bank activity in determining the outlook for gold prices, given this year’s lacklustre flows into gold ETFs.
“Global central bank gold holdings have increased by an average of 450 tonnes per annum since 2009, compared with inflows into gold ETFs which have averaged just under 325 tonnes per annum over the past five years.”
James Steel, precious metals analyst at HSBC said that the gold market had shifted its attention from the Greek sovereign debt crisis and negotiations over the US budget ceiling to the broader pull-back in commodity prices linked to a slowdown in Chinese manufacturing activity.
“The shift in focus by gold (investors) from sovereign debt and fiscal issues to (other) commodities is interesting,” said Mr Steel.
He pointed out that recent weakness in commodity prices had led to some selling pressure in the gold market from index investors (broad commodity indices hold gold as well as oil, base metals and agricultural commodities).
Mr Steel added that if commodity prices continued to weaken due to concerns about the outlook for global growth, those declines could create “significant headwinds” for the gold market.
Edel Tully, precious metals analyst at UBS, described the mood towards gold as “cautious” with prices likely to remain rangebound around the of $1,500 an ounce level.
“It is clear that physical demand will help provide a floor (for prices) below $1,500 but there is a distinct lack of investor demand above $1,500.”
Ms Tully said the pattern of rangebound trading could continue until a new macroeconomic factor emerged or an existing one intensified, the likeliest issues would be renewed fears of a Greek debt restructuring and the US debt-ceiling debate.