Gold ETF Outflows: A Cause for Concern?
Recent bearish calls on gold prices have been heavily supported with the fact that Gold ETFs have experienced “heavy outflows” in February. The underlying bearish assumption is that the longer-term investors in gold ETFs are perhaps rotating their funds into “riskier” assets, seeing less need for protection from inflation or deflation, as the economy slowly rebounds. We take a closer look at the relationship between the gold prices and the known gold ETFs holdings (see figure 1).
Our first observation is that the ETF gold holdings (green line) are still in a very strong uptrend, which is bullish for gold. Second, the price of gold (yellow line) is also still in an uptrend, however, at the critical technical support level. Third, the price of gold and the gold ETF holdings seem to be positively correlated over the last 10 years. Thus, one could assume that a drop in the gold ETF holdings could cause a drop in gold prices. However, the correlation between two time-series does not imply the causation!
Further, over the various sub-periods, the correlation between gold prices and ETF gold holdings has not been always positive. For example, the price of gold significantly corrected in 2008, while the gold ETF holdings continued to steadily increase, which is an example of negative correlation over the shorter period of time. Further, the gold ETF holdings leveled-off in mid-2010 for next 12 months, during which period the price of gold went from nearly $1200 to over $1900! Also, as the gold price corrected following the 2011 peak and entered the current range, the gold ETF holdings continued to rise, until of course Feb of 2013, during which time the gold price also dropped.
Read More: http://www.stockgoldmarket.com/gold-etf-outflows-a-cause-for-concern
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