Gold – Still Widely Hated

Bearish Sentiment and Depository Flows

Whether it is Goldman Sachs, Morgan Stanley, or lesser known ‘metal consultancies’, there is unanimity among analysts about gold: it will go lower. Four days before gold briefly regained the $1,300 level, Morgan Stanley was certain it would “not see the $1,300 level again in 2014”. Some of the arguments make at least superficial sense, e.g. Goldman expects a stronger US economy (the famed ‘second half’ recovery is on its way once again), while Morgan Stanley is still waiting for a ‘stronger dollar and rising interest rates’ since January (neither has obviously occurred, but these would be headwinds for gold if they were to happen).

The aforementioned metal consultancy mentions among other things a “21.8 tonne structural deficit in the market last year” as well as ETF outflows, both of which represent not even rounding errors in gold’s overall supply-demand picture. We cannot be sure what the total global gold supply amounts to precisely, but given new mine production of about 2,500 tons p.a., the supply increases by about 1.4% every year and may by now well amount to between 175,000 to 180,000 tons. In what way a ‘21.8 ton structural deficit’ could have mattered last year is therefore a mystery.

The same goes for ETF outflows, which similar to central bank buying hardly matter to gold’s price. ETF flows are aneffect, not a cause of gold’s price movements – mainly they depend on the intra-day price moves in GLD relative to spot gold.

Authorized participants in GLD tend to buy physical gold and create shares when the ETF trades at a premium to spot, and tend to do the opposite when it trades at a discount (provided the premium/discount is large enough to make the transaction worthwhile. With short term interest rates close to zero, these premiums and discounts don’t need to be very large). Thus, GLD and similar open-ended ETFs are  reflecting short term sentiment on gold, but they are certainly not price drivers. One only needs to look at SLV’s holdings: silver has declined even more sharply than gold, but SLV’s holdings have remained stable and even risen slightly during a considerable part of the price decline.