Credit Suisse: The Upcoming ETF Unwind Will Pummel Gold

[bobbyw24]

Credit Suisse Standard Securities precious metals analyst David Davis has issued a warning for gold.

Basically, the market experienced a surge of gold ETF buying over the last year, which became the key driver for gold prices. It wasn't like this back in the pre-ETF days mind you, this is how the gold market has changed dramatically into something far more speculative than it used to be.

Now, should ETF demand dry up, the market's supply/demand could be horrendously skewed, according to Mr. Davis:

MiningMX:

[Emphasis added]

“We believe that a major problem is looming on the horizon should investment demand remain muted and/or should investment demand start falling away over the next three to five months,” he said in a research note.

“We believe that the possible muted and/or decline in year-on-year investment demand for ETFs will play a pre-eminent role as a swing factor in our supply-and-demand balance for 2010.”

http://static.businessinsider.com/image/4b9c5e3e7f8b9a865d4e0400-400-/chart.png

ETF demand was 85% higher for 2009 compared to the previous year at nearly 600 tonnes, driven largely by a strong performance in the first quarter. This demand dropped off sharply by the fourth quarter of the year, coming in two thirds lower compared to the same time a year earlier.

“We are of the view that there is increasing downward risk to the gold price should the pace of sales increase. We estimate that institutional divestment alone has the potential to release between 200 tonnes and 300 tonnes in 2010,” Davis said.

Read more here >

http://www.miningmx.com/news/gold_and_silver/ETF-threat-hangs-over-gold.htm

[devil21]

Hmm...I thought ETFs tracked the price of gold, not the other way around.

[noxagol]

No, I think that crashing ETF's will sky rocket the price of gold. As people realize that ETF's could possibly result in nothing, they will stop buying them and seek physical gold, which will create increased demand on a decreased supply.

[tmosley]

Credit Suisse? You mean the guys with the huge short positions in the PM markets.

Sure, let's beleive whatever they say. They are obviously a disinterested party.

[echebota]

As far as I know GLD ETF is supposed to buy or sell the physical gold (or at least spot futures) to reflect the changes in net amount of gold owned by GLD investors. So GLD does not track gold prices, it actually supposed to own gold.

The CS is saying that GLD ETF net gold purchases now account for a big percentage of the overall gold demand (they don't actually indicate what percentage??). But they draw a wrong conclusion - I don't see a risk for gold price, it might be a risk for the GLD and GLD investors though :)

I don't think that anybody except YumYum here believes that demand for gold overall (with or without GLD) would be in a sharp decline any time soon. Demand for GLD on the other hand is in a risky zone, since any news on a mismatch between gold on the GLD books and physical gold they own would send the GLD investors in a GLD dumping mode. GLD price would plummet, but spot gold price would not. The people who would dump GLD would have to replace their positions in GLD with physical gold since they still want and need the gold!!! It's just they would not use GLD to execute on this need.

In fact if GLD busts I'd even anticipate a short spike in gold price since the gold missing from the GLD storage represents a postponed demand for gold, which would be executed by the market once this shortage is discovered.

[dannno]

Allan Seccombe.....

Decoupling. Learn the definition.

[Jordan]

Conspiracies aside, the author has a point.

Investors who desired easy access gold via the stock markets now have it, and have had it for a few years via GLD. Before you either had to trade futures or buy physical metals which isn't exactly a top priority for individual investors. (Few individuals have futures accounts and I'd reckon even less actually want physical metals.)