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Comment by Atanas Djumaliev, Head of global commodities at VTB Capital for Financial Times

25 November 2016
The Financial Times
Gold bugs face steamroller from fund outflows

Precious metal has fallen below $1,200 a troy ounce for the first time since February. A declining gold market faces a major challenge as a $3.8bn outflow from exchange traded funds over the past 10 days is seen intensifying the liquidation of holdings by investors. Gold has dropped below $1,200 a troy ounce for the first time since February as ETF outflows have risen to their highest level since July 2015.

A stronger dollar, higher US yields and a rallying stock market since the election of Donald Trump has made gold less attractive. The precious metal has fallen 7 per cent since the election earlier this month as traders have also cut their net holdings or longs on the Comex futures markets in New York.

“There’s been a very material correction in US interest rates, which is the main driver of the gold price at the moment,” said Atanas Djumaliev, head of global commodities at Russia’s VTB Capital. “A lot of speculative positions are being unwound and net shorts in gold are increasing.”

The dominant role played by ETFs across markets was demonstrated for much of this year, as over $60bn of inflows helped propel the gold price to $1,366.38 an ounce, a gain of 30 per cent for the year up to July.

As holdings in the funds become unprofitable at current prices, analysts warn of greater turmoil for the gold market. The amount held in gold ETFs fell by 13.7 tonnes by Tuesday, putting total holdings at a five-month low of around 1,900 tonnes, according to Commerzbank.

“Investors are likely to liquidate more ETFs as the investment case for gold at the moment is not attractive — that makes gold prices quite vulnerable,” Georgette Boele, an analyst at ABN Amro, said. That could drive gold back down to $1,100 from the current price of $1,186 a troy ounce, she said.

With the potential of between 100 and 200 tonnes of gold having been bought above current levels, the risk of further liquidation “remains high,” according to Ole Hansen, head of commodity strategy at Saxo Bank.

Options on gold are also pointing to lower prices with buying this week of put options, which give the holder the right to sell at a specified price, at prices as low as $1,100 and $1,050, according to David Govett, head of precious metals at broker Marex Spectron.

The world’s largest gold-backed ETF, the SPDR Gold Shares, has seen 1.9m ounces of gold outflows since Trump’s election taking total holdings to $34bn, down from $43bn in July. Investors bought a total of $64.5bn in gold-backed ETFs this year as of the end of the third quarter, according to the World Gold Council.

Still analysts at Société Générale, who lowered their gold forecast to $1,260 a troy ounce this year, said they were “cautiously bullish” due to political uncertainty in Europe, with upcoming elections in France, Netherlands and Italy.

“While perceived higher uncertainty strengthens the case for holding gold as a diversifier and hedge, possible changes in fiscal policy could push real rates higher, offsetting safe-haven demand and creating downside risks for gold,” Robin Bhar, an analyst at Société Générale, said. “All-in-all, gold prices are at the mercy of risk appetite.”

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