Gold News

Gold ETF 'Attrition' Wears On as US Data Backs 'Higher for Longer' Fed Rates

FRESH outflows from gold-backed ETF investment funds were followed by the precious metal dipping beneath $1920 per Troy ounce in London trade Wednesday, the lowest price in over a week, as betting rose that the US Federal Reserve will hold if not raise interest rates by the end of 2023.
Silver ETF selling has also continued, with the more industrially-useful precious metal dropping to new 2-week lows close to $23 per ounce as gold fell on Wednesday's better-than-expected US services sector PMI data from the ISM association.
From a week ago, silver prices have now fallen by 4.3%, the steepest 5-session drop in a month, taking the Dollar rate down to a 2-week low beneath $23.50 per Troy ounce at today's London midday benchmarking auction.
Global stock markets meantime fell for a 2nd day running, dropping to the lowest in almost 2 weeks on the MSCI World Index as yet another loss in Chinese equities – hit by debt default fears across its massive real-estate development sector – was followed by the EuroStoxx 600 losing 0.5% and New York opening 0.4% lower.
"Metals prices have fallen sharply and the stock market's fallen sharply too," says metals-market analyst Jeff Christian at New York-based consultancy CPM Group.
"I think that all represents investor views that the economy is doing better [than previously thought] and that probably will keep interest rates stronger and higher for longer. So they're adjusting their portfolios downward."
Chart of gold-backed ETF trust fund holdings (tonnes, right) vs. US Dollar gold price (ounces, left). Source: BullionVault
Investors cut the size of the giant GLD gold ETF trust fund yet again Tuesday, reversing more than 1/3rd of last week's small inflow – the first weekly growth since late-July.
Smaller competitor the IAU gold ETF also shrank Tuesday as shareholders liquidated stock, taking it down to the smallest size since May 2020.
Already last month "Physically-backed gold ETFs experienced net outflows for the 3rd straight month" says Krishan Gopaul, analyst at the mining industry's World Gold Council, dropping $2.5 billion by value as products listed on North American and European stock markets shrank by 1.6% to the smallest size since March 2020, start of the global Covid catastrophe.
Across the 20 years following the launch of gold-backed ETFs in 2003, the size of those trust-fund holdings worldwide showed a strongly positive 12-month correlation with month-end gold prices, giving an 'r' coefficient on average of +0.70 – a figure which would read +1.0 if they moved in lockstep together – as ETFs typically grew in size when gold prices rose and vice versa.
So far in 2023, in contrast, that correlation has flipped to the most negative ever, reading -0.67 across the 12 months to the end of August as Dollar gold prices rose 13.2% from a year earlier but gold ETFs as a whole shrank by 8.8%.
"Gold has suffered continued attrition," says bullion-market specialist Rhona O'Connell at brokerage StoneX, reviewing the action in ETF holdings and noting that "Since the start of August there have been just five [trading] days from a total of 25 in which there were any creations" of new shares, reflecting new investor demand.
"Silver [meanwhile saw] some heavy sales at end-August after silver's 13% [price] rally over the previous fortnight to test $25," with the silver ETF market as a whole now shrinking by 5% from the end of 2022 on O'Connell's data.
Both US and German factory orders fell harder on July's data than analysts forecast, dropping 2.1% and 11.7% respectively from 12 months earlier.
But retail sales across the 20-nation Eurozone fell less sharply, as did April-to-June's pace of economic growth in Australia – where Reserve Bank governor Philip Lowe today ended his 7 years in charge with a 'no change' decision on interest rates at the highest cost of borrowing in over a decade – slipping only to 2.1% per year from 2.4% in Q1.
The National Bank of Poland meantime slashed its key interest by 0.75 points to 6.0%, markedly below the pace of inflation.
US interest rates will now end 2023 at 5.50% according to the consensus bet on Dec Fed fund futures, data from the CME derivatives exchange says, reaching the very upper limit of the US central bank's current target range for only the 2nd time since March's mini-crisis in US regional banking stocks saw speculators flip to betting on steep rate cuts by December.
After last week's PMI factory reports said US manufacturing shrank less badly than expected in August, today's ISM service-sector survey said activity accelerated last month, with prices paid by purchasing managers also rising along with employment and new orders.
The S&P Global PMI contradicted that view, however, putting growth across the US services sector at the weakest since January.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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