Gold News

Western Investors 'Badly Underweight' Gold After ETFs Erase Covid Inflows

The PRICE of GOLD reversed yesterday's 1.2% rally versus a stronger US Dollar on Wednesday, trading over $100 per Troy ounce below last week's fresh all-time high after bullion-backed ETFs shrank yet again and longer-term interest rates rose in the bond market on further Fed warnings about inflation.
Global stock markets fell further from this month's new all-time highs on the MSCI World Index, and silver fell 50 cents from Tuesday's high of $32.29 – close to last week's new 12-year highs – as industrial metal copper gave back its bounce after losing almost 10% from mid-May's new record high.
Trading back down to $2335 in London's bullion market, gold prices in the precious metal's No.1 consumer nation China had risen further overnight as the Yuan dropped yet again versus other major currencies, offering new imports of gold to Shanghai a premium of $32 per Troy ounce, four times the historical average incentive.
But among Western investment products, giant gold-backed ETF the SPDR trust (NYSEArca:GLD) yesterday held unchanged in size after last week marked its first weekly outflows of investor cash in 3 weeks.
World No.2 competitor the iShares gold ETF (NYSEArca:IAU) also held at its smallest in almost 2 weeks on Tuesday night having also shrunk by one-third from the Covid Crisis peak of late-2020. 
Reversing all of the pandemic's inflows as a sector, "ETF investors now own the same volume of gold as they did in 2019," notes Robert Minter, director of ETF strategy at half-trillion-dollar UK asset managers Abrdn.
"It is as if pandemic spending, US debt expansion, deglobalization, and structural labor market changes have never happened. Investors are underweight by almost any objective look at the US debt and deficit relative to GDP, currently at levels last seen during World War 2."
Chart of $bn value of gold ETFs + Comex net speculative position vs. the SPY ETF of S&P500 stocks. Source: MKS Pamp
"Precious metals, as a sector and in relation to the massive wealth and systematic liquidity generated post-Covid, remains grossly underweight!" agrees metals strategist Nicky Shiels at Swiss gold refining and finance group MKS Pamp, noting a recent report from Swiss banking giant UBS that says wealthy investors managing their money through family offices currently hold only 1% in bullion.
Combining the value of all gold ETFs – most of which trade on Western-economy bourses – plus the net bullish value in Comex futures contracts held by speculative traders, "Western positioning [in gold] accounts for 0.7% of US equities," Shiels says, using the SPDR S&P500 ETF Trust (NYSEArca:SPY) as a proxy for the value of investment in the world's No.1 equity market.
"That allocation has shifted up from its historical floor around +0.5%, but remains very underweight vs Covid peak (~1%) and the bull market era in 2010-2012 (1.5-2%)."
Gold ETF sentiment "may improve once the Federal Reserve starts cutting rates," reckons Mintner at Abrdn.
"A rate cut is prudent in June, given the weakness in some areas of the lower-income economy and lingering risks in the commercial real estate market."
But "many more months of positive [ie, lower] inflation data [are needed] to give me confidence that it's appropriate to dial back," said Minneapolis Fed President Neel Kashkari – a non-voting member of the FOMC until 2026 – to CNBC on Tuesday, echoing last week's unison of hawkish Fed comments from other US policymakers.
Asked if the Federal Reserve might next raise interest rates in 2024 rather than cut them, "I don't think we should rule anything out at this point," Kashkari added.
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Fellow 'hawk' and 2024 voter Raphael Bostic of the Atlanta Fed speaks later on Wednesday, as does 'centrist' John Williams, President and CEO of the vital New York operation.
Betting that the Fed will cut rates in September – a move predicted for March by the futures market back at the start of this year – today put the odds at worse than 50-50.
Fed rates will then end 2024 at 5.07% according to consensus betting today, the highest such forecast since end-April, when gold prices briefly dipped through $2300 per Troy ounce.
That would require just 1 rate cut from the Fed before Christmas, contrasting with the 3 rate cuts predicted by the central bank's own policy team in the Fed's March 'dot plot' forecasts, now due for updating at the June meeting in 2 weeks' time.
Inflation in Australia quickened in April rather than slowing as analysts forecast, new data said Wednesday, and the cost of living has risen faster than expected in Germany in May, today's first estimate from Destatis said.
The Eurozone's largest economy, Germany has this month seen consumer-price inflation of 2.8% on the benchmark 'harmonized' measure, the fastest pace since January.
Gold priced in the Euro fell back to €2156 per Troy ounce while the UK gold price in Pounds also erased yesterday's rally to trade at £1835.
Friday's inflation data for the 20-nation Euro area is expected to show the cost of living rising 2.8% this month from May last year, accelerating 0.1 points from April's 2-year low.
That day's US inflation data on the core PCE measure – the Federal Reserve's preferred and target index, aiming for 2.0% per year – is also forecast at 2.8% for April, unchanged from March at the slowest since spring 2021.

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.

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