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Gold Investors Piling Into ETFs Amid Price Fall

Kitco News

(Kitco News) - Holdings of gold by global exchange-traded funds have risen to a multi-year high, even if the price of the metal has gone the other way lately.

Comex April gold was trading at $1,310 an ounce as of 8:30 a.m. EDT. The metal closed at $1,325 last Wednesday, before three straight days of large ETF inflows.

Analysts suggested the price dip has encouraged buying of gold ETFs, as has nervousness about the stock market. However, observers suggested this ETF buying has been offset by speculative selling and liquidation ahead of this week’s meeting of the Federal Open Market Committee, which is expected to hike U.S. interest rates another 25 basis points.

Gold ETFs trade like stocks but track the price of the commodity, with metal put into storage to back the shares. This generally reflects positions that investors hold for the long term, with some of the world’s largest hedge funds often turning to SPDR Gold Shares – the largest such gold ETF – for exposure to the gold market.

“The proximity of the price to the $1,300 mark appears to be attracting additional buyers,” said analysts at Commerzbank in a research note.

Gold ETFs posted inflows of 14.3 tonnes Monday, their highest daily inflow since September, the bank said. This brings total inflows in the past three days of trading to 23 tonnes.

“Despite preparation for the Fed to raise rates again, investors have accumulated the biggest holdings in gold-backed funds in almost five years as U.S. President Donald Trump rocks the boat on trade and the equity market wobbles,” said commodities brokerage SP Angel. “Worldwide holdings in exchange-traded investments jumped to 2,267 tonnes, the highest since May 2013.”

There has been some increased demand for physical metal lately, Bart Melek, head of commodities strategy at TD Securities, told Kitco News in an interview.

“There is some nervousness surrounding equity markets,” he continued. “That [ETF buying] might be people’s way to hedge with gold against risk.”

The Dow Jones Industrial Average tumbled to its lowest level in two weeks Monday. Stocks have not been able to return to their record highs in January, in part on worries about a global trade war after the Trump administration proposed steel and aluminum tariffs.

But while ETF holdings are up, April gold has lost $15 over the last few trading days.

“Sometimes that happens,” Melek said. “We did say we could be seeing some downward pressure ahead of the FOMC, which is coming upon us in fairly quick order.”

A two-day FOMC meeting begins Tuesday morning and wraps up Wednesday, with a policy statement scheduled for release then at 2 p.m. EDT. At the same time, the Fed will release updated forecasts, and a half an hour later, Jerome Powell will hold his first news conference as new Fed chief. Traders are expecting another 25-basis-point rate hike.

Rate hikes tend to hurt precious metals since they help the U.S. dollar and also increase gold’s so-called “opportunity cost,” which is the lost income from not holding interest-bearing assets instead. Melek pointed out, however, that the trend in the Fed’s current rate-hiking cycle has been for gold to fall ahead of meetings, and then rally afterward.

Commerzbank pointed out that the ETF buying is in fact underpinning gold by helping the metal hold above support.

“The high level of buying interest displayed by ETF investors is also likely to prevent the gold price from sliding below the psychologically important $1,300-per-troy-ounce mark,” they said.

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