Gold ETFs Could Find Support From Central Banks

by: Tom Lydon

Despite the savage losses incurred as gold prices plunged earlier this year, global central banks still desire gold, supporting precious metal prices and exchange traded funds.

According to the World Gold Council, central banks hold 18% of the gold ever mined and will add another 350 tons, or $15 billion worth, this year, Bloomberg reports.

In 2012, central banks acquired 535 tons, the most since 1964.

However, gold prices have been faltering so far this year after a 12 consecutive-year rally. Gold has declined about 21% so far in 2013, the largest decline since 1981.

Gold futures were trading around $1,324 per ounce Tuesday.

Central banks have been known to mistime gold investments, buying high and selling low, as a way to shield economies from inflation. Fed Chairman Ben Bernanke described gold as an asset rather than money and pointed out that central banks own bullion as a "long-term tradition."

"Central bankers have typically bought when you probably should be selling and selling when you probably should be buying," Michael Strauss, chief investment strategist and chief economist at Commonfund Group, said in the article. "It's going to be a difficult market and sometimes the price of gold is driven by emotions rather than fundamental factors. Central banks have been bad traders of gold."

Some emerging market central banks are beginning to hoard gold as a defensive alternative currency. For instance, Venezuela holds 67% of its reserves in gold.

"Some central bankers have come to see gold as an alternative currency, certainly as a defense against potential inflationary pressures from the historical deployment of quantitative easing and low rates by global central banks," Quincy Krosby, a market strategist for Prudential Financial Inc., said in the article.

Meanwhile, gold-related exchange traded products saw $60.4 billion, or 43% of assets, in outflows this year. The SPDR Gold Trust (NYSEARCA:GLD) has declined about 21% year-to-date.

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.

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