Retail-based demand jumps even as institutions undergo a massive exodus
By Moming Zhou
November 18, 2008
NEW YORK (MarketWatch) — Retail investors sharply increased their demand for gold bars and coins in the past few months as they struggled to find a safe place for their money amid the financial crisis, research shows.
But institutional investors have kept the upper hand, according to Wednesday’s report from the World Gold Council, a gold mining industry association. Heavy selling by institutions has more than offset retail buying and pushed gold prices to their lowest level in more than a year.
Moves by retail investors, including demand for bars and coins, resulted in a net inflow of 232 tons (7.46 million ounces) in the third quarter, compared to 105 tons in the same time frame a year ago.
The figures, compiled independently for the council by GFMS Ltd, a precious metals consultancy, show strong bar and coin buying in Swiss, German and U.S. markets.
Meanwhile, gold holdings in exchange-traded funds rose 150 tons, compared with an increase of 4 tons in the second quarter and 139.5 tons in the third quarter a year ago. The peak in ETF inflows occurred in late September after the collapse of Lehman Brothers.
Much of that money added to the gold holdings in the SPDR Gold Trust, the largest gold ETF, to more than 770 tons in October, a cache that exceeds the official holdings of Japan, which has the world’s seventh-biggest gold reserves.
Demand for physical gold didn’t slow even when some financial institutions were forced to sell their gold assets to ease the squeeze in their cash balances.
“Funds who would like to keep their asset of last resort are being forced to sell,” said Peter Spina, an analyst at GoldSeek.com. “This is causing weakness in the paper gold market price, but it is not a true reflection of the physical market.”
“There will be more victims of the fund collapse and more forced liquidations even if it requires selling your most desired assets such as precious metals,” he added. “Once this process works itself through, the true market prices for gold will readjust.”
Gold futures closed at $732.80 Tuesday on the Comex division of the New York Mercantile Exchange, 26% lower than its record high above $1,000 an ounce hit in March.
Comex futures dropped to below $700 an ounce last month, the lowest since September 2007.
The London gold-fixing price, a benchmark for gold traded between big institutions, stood at $738 an ounce, down 28% from its record high of $1,023 hit in March.
Despite selling on the institutional side, physical demand for the metal has remained strong.
Including industrial and dental use, physical gold demand in dollar value hit an all-time high of $31.8 billion in the third quarter, the WGC reported. In tonnage terms, it stood at 647.6 tons, the highest since the second quarter of 2007.
Institutions dump gold contracts
On the other side of the tussle, some institution investors sharply reduced their gold holdings for much-needed cash in the face of the credit crunch.
Institution investment saw a net outflow of nearly 300 tons in the third quarter, according to the WGC, which more than offset the inflows in the retail sector.
Big institutions trade with each other directly in large orders through the opaque over-the-counter markets. They also bet on futures exchanges in New York, Tokyo and a few other places.
Gold was “one of the few assets remaining that could be sold at a reasonable price to meet margin calls on other, worse-performing assets,” the WGC said in the report.
The significant outflow in the institutional level explains why the gold price did not perform better in the face of strong jewelry buying and demand for physical gold, the WGC said in the report.
Comex gold futures topped $900 an ounce in September after Lehman’s bankruptcy filing. But prices have since seen roller-coaster declines. Futures tumbled 18% in October, the largest monthly loss since February 1983.
Some analysts said gold prices would rebound soon as much of the selling that occurred among institutions had a short term focus, and did not reflect a decline in gold’s fundamentals.
“In the gold market, the moment the weight of forced selling stops, the demand-supply balance will take precious metals higher and quickly,” said Julian Phillips, an analyst at GoldForecaster.com.
Despite gold’s recent weakness, it’s “still doing an admirable job” in terms of wealth preservation, said Mark O’Byrne, executive director at Gold & Silver Investments Ltd.
The metal’s up 10% from its low in August 2007, when the financial crisis started. In contrast, the S&P 500 Index has slumped about 40%. Other commodities have seen even bigger losses. Crude oil has lost more than 60% from its peak prices.
Prices to remain volatile
Gold coins and bars provide an easier channel for retail investors who can’t afford OTC or futures trading but can buy gold through dealers online, much like buying a book at Amazon.com.
Demand for gold coins rose so sharply in the past few months that the U.S. Mint, the coin-producing division of the Treasury Department, had to freeze sales of some of its gold coins and put a few others under allocations.
Jon Nadler, senior analyst at Kitco Bullion Dealers, said demand for gold bars and coins was robust at his firm. But he also pointed out that some investors, frustrated by gold’s lack of price performance, were recently selling their gold coins and bars back to dealers.
Gold holdings in ETFs have also been declining recently. The SPDR Gold Trust held 748.94 tons of gold as of Monday, down nearly 22 tons from the October record. Prices of the ETF, which tracks gold prices, have dropped more than 25% from the March record above $100 a share.
The tussle between retail and institution investors, however, isn’t over, and prices are to remain volatile.
“Gold’s safe-haven appeal should continue, but so too will the possibility of heightened levels of activity in the speculative side of the gold market,” said James Burton, chief executive officer of the WGC, in a news release. “It’s too soon to call an end to market volatility.”
Moming Zhou is a MarketWatch reporter based in New York.