The rush for money debasement around the world has escaped nobody’s attention, and as a result the one undilutable commodity (unless everyone demands physical delivery at the same time) gold has seen investors around the world scramble to get their hands on the commodity, either in physical form or via ETFs. The World Gold Council has released its Q1 2010 update, according to which “Investors bought 5.6 net tonnes of gold via exchange traded funds (ETFs) in Q1 2010.” This has brought the total amount of gold in monitored ETFs hit a new record of 1,768 tonnes ($63.4 billion worth of the shiny metal). Some more on the unquenchable demand for gold: “GFMS reports that the over-the-counter market saw a moderate increase in net demand during the first quarter. Meanwhile, previously existing long positions have generally continued to be very firmly held. Net long positions on gold futures contracts, a proxy for the more speculative investment, fell from the highs experienced in Q4 2009, but they remain high by historical standards.” Despite the persistently high price of gold, and despite the strength of the dollar over the past quarter, demand for gold is not going away.
More details on the Investment Trends as repoted by the WGC:
Exchange traded funds
Investors bought 5.6 net tonnes of gold via exchange traded funds (ETFs) in Q1 2010, bringing the total amount of gold in the ETFs that we monitor to a new record of 1,768 tonnes, worth US$63.4 billion at the quarter-end gold price. ZKB Gold ETF and Julius Baer Physical Gold ETF, both listed on the Swiss Exchange (SWX), recorded the strongest inflows during the first quarter, adding 10.2 and 8.1 tonnes respectively, as interest in the Swiss-based securities continued. These funds remain small, however, compared to SPDR® Gold Shares, or GLD as it is known, listed on the NYSE Arca and cross-listed in Mexico, Singapore, Tokyo and Hong Kong with 1,130 tonnes (worth US$40.5 billion) in assets. GBS Bullion Securities (listed on the London Stock exchange) shed 7.8 tonnes in Q1, the largest net outflow of the ETFs we monitor.
Trading in GLD options fell in the first quarter of 2010 to a total of 11.5 million contracts from 13.7 million in Q4 2009, but remained high relative to the historical average of 7.5 million contracts (from Q3 2008 to Q1 2010). Volumes sharply decreased from an average high of 283,072 contracts per day in December 2009 to a daily average of 143,168 contracts by March 2010. After retreating for most of January, call and put volumes spiked again on 5 February at 215,324 and 132,922 contracts respectively, the same day the yellow metal fell by more than 4.0% and reached the quarter’s low of US$1,058.00/oz, on the London PM fix. Subsequently, option volumes started to fall coinciding with the downward trend in gold volatility. At-the-money implied volatilities on the 3-month call and put options trended downwards during the quarter; implied volatility reached the high for the quarter on 4 February trading at 25.7%, finally retrenching back to 17.4% by the end of the quarter.
COMEX total non-commercial and non-reportable net long positions, a proxy for the more speculative end of investment demand, gradually fell over the quarter. The net long ultimately shed 7.1 million ounces to 20.8 million ounces by the end of Q1 2010, compared to the end of Q4 2009. On average, net long positions in the first quarter of 2010 decreased by 13.8% from 29.2 million ounces in Q4 2009. The net long fell for most of January and February, to later spike up back to 25.2 million ounces in March, as the trade-weighted dollar lost some ground from its peak in late February. This peak was short-lived, as the trade-weighted dollar gained momentum again (primarily on the back of continuing concerns surrounding fiscal and credit woes in Europe) and the net long position in gold fell back again. Overall, both long-only and short-only positions decreased over the quarter. Long-only positions fell by 13.7% on average during Q1 2010 relative to the previous quarter, more than offsetting a 3.0% reduction in short-only contracts during the same period. Whilst net long positions decreased on average during Q1 2010, the price of gold remained well supported throughout the quarter, as physical demand fl ows for gold appeared not to be driven by speculative trading. Nevertheless, net long positions on gold remain high by historical standards, as these kinds of investors also continue to see value in the gold trade.
According to research carried out by GFMS on behalf of the World Gold Council, investor activity in the over-the-counter (OTC) market saw a moderate increase in long positions during the first quarter. Anecdotal evidence and preliminary analysis by GFMS suggest that this moderate increase reflects slower than expected commitment to gold from so-called ‘real money’ funds, partly on the back of dynamics between the gold market and global economic developments including the sovereign debt crisis in Europe. Meanwhile, GFMS believes previously existing long positions have generally continued to be very firmly held, with very little in the way of liquidations in recent months. Moreover, gold’s strong performance in 2009 coupled with other considerations such as its portfolio diversification and inflation hedge characteristics were likely behind the fresh wave of allocations that occurred at the beginning of 2010. Finally, GFMS finds evidence that most of the OTC activity has been on the form of “plain vanilla” rather than structured products, in particular in the form of allocated gold positions.
Bars and coins
The latest available data on coin and bar sales corresponds to Q4 2009 (comprehensive Q1 2010 data will be released in mid-May). Net retail demand for gold, which includes demand for coins, small bars, medals and imitation coins and other retail investment, remained strong during the fourth quarter. It rose by 14.0 tonnes to 187.9 tonnes in Q4 2009, an increase of 8.0% on the previous quarter. This largely reflected a recovery in investment demand primarily in the US— which experienced the single biggest infl ow during the quarter from 19.0 tonnes in Q3 to 37.3 tonnes in Q4 2009—followed closely by India, which increased by 15.6 tonnes. Overall, European investment fl ows also enjoyed solid gains during Q4 2009 adding 7.2 tonnes. Whilst bar and coin demand in Q4 2009 was not as strong for China relative to Q3, anecdotal evidence suggests that Q1 2010 experienced strong demand for physical bars which kept suppliers (including importers to SGE) fabricating gold bars till the last day before the Chinese New Year holiday (14 February 2010)—a peak season for both gold bars and jewellery demand. In the US, first quarter data on American Eagle bullion coin sales from the US Mint shows a more modest picture relative to a very strong Q4 2009. Demand for 1-ounce coins in Q1 2010 was 271,000 ounces (8.4 tonnes), compared to 362,000 ounces (11.2 tonnes) in Q4 2009. Overall demand, however, remains high by historical standards. Investors wishing to purchase gold coins or small bars can find a list of retail dealers on our website at: http://www.invest.gold.org/sites/en/where_to_invest/directory.
The implied gold lease rate is the difference between the dollar interest rate and the equivalent duration gold forward rate—the rate at which gold holders are willing to lend gold in exchange for dollars (also known as the swap rate). Of the two components, the 3-month US Libor started to rise to 0.30% by the end of the quarter from around 0.25% in early January. The second component, the 3-month gold swap rate, fell to a low of 0.16% by the end of January from 0.39% in end-December 2009, before rising modestly back to 0.22% by the end of the quarter. Consequently, the implied gold lease rate turned slightly positive in Q1 after being negative for most of Q4 2009.
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