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Gold falls by 13.7% in 2 days, as Gold ETP outflows reach $1 Billion (760,000oz)

Tuesday 16th April '13

Tuesday, 16 April 2013: Global gold ETPs continued to see huge trading and sustained outflows as gold prices fell 13.7% over the past two days.  Global gold ETPs traded $14 Bn on world stock exchanges, with trading volumes up 630% from the three month average.  Gold ETP holdings have fallen from 84.6 Moz to 76.6 Moz as of Monday, a fall of approx. 10% or around $11 Bn.  This marks a large turn around as global gold ETP holdings continued to grow up to the end of 2012, despite gold prices having fallen 12% over the same period. 

As a result of the recent price activity, leverage and short ETPs have been performing very well.  BOOST Gold 3x Short Daily ETP (3GOS) returned 44% over the past two days, highlighting the use of these short term products to investors.  An investor with a $10,000 investment in gold ETPs could have bought $3,333 of 3GOS for two days to negate the $1,370 fall in their gold ETP investment.  Ignoring trading costs, a two-day investment in 3GOS would have cost an investor around $0.50 for two days, indicating that 3x Short ETPs can be used as cheap insurance against falls in asset prices or portfolios. 

Viktor Nossek, Head of Research at BOOST ETP comments:

“Potential gold reserves sales to fund the financial crisis by indebted countries other than Cyprus instigated Friday’s 5% gold price plunge. With central banks’ net purchases having contributed approx. 14% of total demand for gold in Q1, a key supporting factor for gold prices is eroding. Given the momentum in gold, its high price in real terms, incentives to hoard gold by central banks at this stage is reduced.

“The speed and extent of the sell-offs seems excessively brutal, so short covering may drive a quick rebound. But the damage has already been done: investor confidence in the commodity as a result of the 15% drop over the last week has been shaken, and net outflows are likely to continue until prices stabilise.

“Key for gold near term will be sentiment on equity markets: Markets have been pulled down by the materials sector, driving commodity-rich stock markets in Canada, Brazil, Mexico, S Africa and Russia in negative YTD performance. But other, broad-based indices in US, Europe and Asia have held up well, helping the risk-on trades to stay in the game.”

Nik Bienkowski, Co-CEO of BOOST ETP comments:

“Due to market volatility over the past few years and sideways trending prices, including the relatively poor performance of gold, investors have been looking to take short and/or leveraged positions against the world’s most liquid financial indices.  As a result, BOOST launched a platform of 3x Leverage and 3x Short collateralised ETPs to be used in situations such as this. 

“With the fall in the gold price over the past few days, investors who missed the opportunity to short gold are now looking for opportunities when gold rebounds.  Even if the long term gold price was expected to fall, large price falls like we have seen are often reversed partially in the short term.  If an investor believes the gold price will rebound only 3% today after the 13.7% fall, then Boost Gold 3x Leverage Daily ETP (3GOL) would rise by 9%.”

These Exchange Traded Commodities (ETCs) are designed to return 3x the daily movement, long or short, of the relevant benchmark index. For example, if the NASDAQ Commodity Gold index rises by 1% on a particular day, then “3GOL” will rise by 3% and “3GOS” will fall by 3%. However, if the NASDAQ Commodity Gold index falls by 1% then “3GOL” will fall by 3% and “3GOS” will rise by 3% (less fees and adjustments).

Demand for transparent leveraged and short products has increased over the past few years with global leveraged and short ETP assets rising to $43 Bn as many financial markets have trended sideways, resulting in volatile but poor long term returns. Leveraged and short ETPs make it possible to take advantage of this short term volatility in world financial markets. Additionally, there is more than $200 Bn of assets in ETCs globally, providing exposure to the world’s leading commodity markets.

Source: sources for all figures – Bloomberg and BOOST ETP