Gold ETFs Drop 2% As Prices Test $1,600 An Ounce

Includes: GLD, IAU, SGOL
by: Tom Lydon

Gold ETFs were down nearly 2% on Friday as April futures contracts briefly dipped below $1,600 an ounce. The precious metal ETFs were on track for weekly declines of about 4%.

Gold was weak following reports that George Soros cut back his position in the largest bullion-backed ETF.

Soros was selling gold in the fourth quarter as demand hit an all-time record at the end of 2012 on greater investment interest in gold and related exchange traded funds and increased central bank hoarding.

Annual gold demand on a value basis rose to $236.4 billion in 2012 as gold prices record another yearly high, according to a World Gold Council annual report.

Considering gold demand on a value basis, both jewelry and investment demand hit their highest level in six quarters, with jewelry demand at a record value in 2012.

However, on a tonnage basis, demand was 4,405.5 metric tons over the year, or down 4% from 2011 as demand from institutional investors and central banks partly offset a year-over-year drop in consumer demand.

Looking at the total gold demand, jewelry made up 43%, technology 10%, bar and coins 29%, ETFs and other funds 6%, and central bank net purchases 12%.

Central bank purchases rose 17% year-over-year, totaling 534.6 tons, the highest level in 48 years.

Global investment demand for ETFs surged 51% year-over-year. Total investment demand, though, slightly receded in the fourth quarter, down 16% compared to the record high in the third quarter of 2012.

"As 2013 unfolds, the expectation is for jewelry demand to soften in volume terms while sustaining healthy values," according to the World Gold Council. "Investment demand, while to some extent dependent on the movement in the gold price during the year and exchange rate effects on local prices, should again exceed historical averages as investors continue to focus on gold's role as a store of wealth."

"Continued innovation in the range of gold investment products available across a range of countries (for example, gold accumulation plans in India and China) confirms the healthy appetite for gold among investors," the World Gold Council added.

Specifically, China is about to launch its first physically backed gold ETF.

According to IndexUniverse data, over the year 2012, SPDR Gold Shares (NYSEARCA:GLD) attracted $5.7 billion in new inflows, iShares Gold Trust (NYSEARCA:IAU) added $2.6 billion, and ETF Securities Swiss Gold Shares (NYSEARCA:SGOL) gathered $170 million.

Max Chen contributed to this article.

Full disclosure: Tom Lydon's clients own GLD.

Disclosure: I am long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.