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It’s been a lousy year for gold. Prices are down more than 8% so far in 2018, after falling below $1,200/oz for the first time in a year earlier this month.
With U.S. stocks back near record highs, the dollar climbing and interest rates globally biased upward, there’s been little reason for investors to park their money in the safe-haven metal. At the same time, demand for physical gold has been tepid at best, according to the latest figures from the World Gold Council.
Gold purchases during the first half of 2018 were at their lowest level since 2009, while gold mine production soared to an all-time high, notes the WGC’s latest Demand Trends Report—a bearish combination for prices.
Spot Gold Price
13-Week Losing Streak
With all these head winds, investors have had little interest in buying gold recently. Bloomberg reported that gold-tracking ETFs, such as the $29 billion SPDR Gold Trust (GLD), the $10 billion iShares Gold Trust (IAU) and others, shed assets for 13 weeks in a row, the longest streak in five years.
The outflows haven’t been especially large—ETFs hold 4 million fewer ounces of gold than they did three months ago—a reduction of 5.5%. But the streak highlights the general listlessness surrounding gold right now, with little reason for investors to get involved.
For the year as a whole, holdings are down about 0.5%, with outflows from U.S. gold ETFs and inflows for European gold ETFs.
Decline Drivers
The lack of demand for gold ETFs may be one of the main reasons prices are sinking in 2018.
“Gold fundamentals, especially on the demand side, have been weak for several years. I don’t think that’s been the key driver for the weakness in gold prices that we’ve seen so far this year,” said Maxwell Gold, director of investment strategy for ETF Securities by Aberdeen Standard Investments.
Rather, “the outflows from gold ETFs are a larger driver of gold in the short term,” he said. “In addition, there’s been an increase of short positioning of speculators in futures markets, which has been a big head wind.”
Overextended Short Trade
Maxwell doesn’t see these bearish factors holding down gold going forward. He noted that short positions in the gold futures market are at record levels, “an overextended trade,” in his view. If gold prices stabilize, that could spark a short covering rally, he notes.
He’s also encouraged by the fact that gold prices remain above their lowest levels of this cycle. Since peaking in 2011, gold bottomed out in December 2015 at around $1,050/oz, more than 12% below current levels.