After twelve consecutive years of increases in the gold price, exchange-traded product (ETP) investors may have expected some kind of market correction. But the speed and extent of the metal’s spring sell-off still took many people by surprise.
And 2013 has been a traumatic period for the whole commodity tracker market, the lion’s share of whose assets is in gold.
During the six months, gold ETPs lost more than 20 percent of their assets under management: ETP holders redeemed $19 billion of gold trackers in the second quarter, following $9 billion of sales in the first quarter.
And while commodity ETPs have seen a fall in assets before, most notably during the financial crisis of 2008, when the prices of many raw materials collapsed, gold had historically held up well in comparison. This year, things changed.
According to ETF Securities, which specialises in providing commodity trackers to investors, the about-turn in gold prices was signalled by a rise in US real interest rates that began late last year.
“We’ve seen inflation expectations in the US fall and nominal interest rates rise,” the firm’s head of research, Nick Brooks, told IndexUniverse.eu.
“As a result, real interest rates have shown quite an aggressive change in direction since October 2012. Unsurprisingly, that’s also coincided with a rise in the dollar. Tactically, this is possibly the worst environment for gold you could imagine.”
ETF Securities has mapped the change in real interest rates in the chart below, which we have reproduced with the firm’s permission. The gold price (in yellow, recorded on the left scale) is shown together with US 10 year real interest rates, as derived from the market for inflation-protected treasuries (in red, inverted, on the right scale).
Real US interest rates, which had spent most of the time in negative territory since late 2011, switched back to positive in the second quarter, reflecting a drop in long-term inflation expectations and a rise in ten year bond yields.
Reflecting the sudden turn-around in market sentiment, gold exchange-traded product investors withdrew their money at the fastest rate since the market for bullion trackers started over a decade ago. At the peak of the withdrawals, two tumultuous days in April saw a 13 percent, $200 price crash in the yellow metal.
Market observers put the scale and speed of the selling down to the exit of leveraged, hedge fund investors, particularly from US-listed gold ETFs.
“Around 90 percent of the selling in April was in North American ETPs, notably State Street’s SPDR Gold ETF (NYSE Arca: GLD),” said ETF Securities’ Brooks, “whereas these ETPs have around a 60 percent global market share. There’s a heavy hedge fund presence in GLD and the sudden exit of leveraged long investors may have been behind the sharp gold price sell-off we saw on April 12 and 15.”