Gold ETF Outflows May Signal Bounce Opportunity

July 31st, 2015 by

The situation has not been especially rosy for exchange-traded funds tied to gold. In fact, it’s been the worst week for the these securities in over 2 years. This trend has followed closely with the general downturn for commodities, which is also having a serious drag on emerging markets. Many emerging markets are highly dependent on commodity exports; moreover, investors who had concentrated assets in potentially high-growth and high-yield emerging markets would have been wise to hedge their investments with some exposure to gold, and may be unwinding those positions as they exit some of the hardest-hit emerging markets.

As part of the emerging market fallout, ETF Securities LLC (who run a number of exchange-traded funds) even announced that it will be terminating its EFTS Asian Gold Trust (NYSE: AGOL), which will liquidate its remaining gold holdings over the next few months during the window for shareholder redemptions. Trading of the fund will cease in mid-August.

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Though far from dissolving like AGOL, other major gold ETFs have not avoided similar outflows. During the second quarter, the SPDR Gold Shares ETF (NYSE: GLD) saw more than $975 million pulled from the fund; if that wasn’t jarring enough, thus far in the third quarter an additional $1.1 billion has been withdrawn from the fund. On whole, the various gold ETFs have seen a steady 11-day streak of outflows.

At the same time, silver ETFs haven’t fared as poorly as their gold counterparts after the most rapid outflows from these funds occurred during the week previous. This makes sense, as the silver price has been mostly idle over that time.

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Surprisingly enough, even amid the sell-off, ETFs that track the Platinum Group metals (like PPLT, PGM, and PTM) have actually seen considerable inflows over July, possibly as commodity-minded investors may turn to platinum and palladium as more attractive alternatives to gold and silver. On Thursday alone, palladium ETFs added 38,000 equivalent ounces of investment, bringing its total in July to 52,000 additional ounces (troy). Meanwhile, platinum ETFs saw inflows of 115,000 ounces. A spokesperson for Commerzebank stated that “platinum and palladium prices would doubtless be significantly lower” if not for these inflows. The same principle applies to the downward pressure on gold prices that the investor flight from gold ETFs is having.

Despite the month of difficult losses, the bump in spot gold thanks to a breather for the dollar, combined with some contrarian wisdom and value investing, have helped the gold funds trade in positive territory today. GLD is up more than half a percentage point this morning to nearly $105/share, a welcome rebound after the fund tumbled almost 10% over the 3 months previous.

Meanwhile, the Market Vectors Gold Miners ETF (NYSE: GDX) and the associated Junior Gold Miners ETF (NYSE: GDXJ) are both trading between 1.5% and 2.5% higher on Friday. Even while these two funds suffered gravely at intervals of the current bear run for the metals, GDX and GDXJ have actually gained 4% and 7.5% over the last week, respectively. As ETFs that hold physical gold lose favor with investors, it seems the gold mining ETFs have been the beneficiary.