UK gold exports to Switzerland surge as investors sell ETFs

Fri Oct 18, 2013 11:52am EDT

* UK gold exports in year to August hit 1,016 T vs 85 T

* Rising exports mirror liquidation from gold funds

* Eventual destination of bullion said to be Asia

By Jan Harvey

LONDON, Oct 18 (Reuters) - A surge in gold exports from the United Kingdom to Switzerland this year may largely be the result of metal sold out of exchange-traded funds being shipped for re-refining before making its way to Asia, according to Australian bank Macquarie.

UK gold exports to Switzerland, Europe's major bullion refining hub, jumped to 1,016.3 tonnes in the first eight months of this year, data from European Union statistics agency Eurostat shows, from 85.1 tonnes in the same period of 2012.

Investor withdrawals from gold ETFs, which issue securities backed by physical bullion, have totalled nearly 670 tonnes so far this year, according to Reuters data, a sharp reversal from average inflows of 332.3 tonnes over the previous five years.

The world's largest gold ETF, New York-listed SPDR Gold Shares, stores its gold holdings in HSBC's London vault, as do other leading ETF operators such as ETF Securities.

Macquarie analyst Matthew Turner said the ETF gold may be being shipped to Switzerland to be processed into smaller bars and other products more attractive for Asian consumers, or possibly to be vaulted there instead.

He cited as evidence a drop-off in gold exports to six-month lows of 98.2 tonnes in August, down nearly 20 percent from July though up from zero in August 2012.

"The reduced level of exports is line with lower outflows from gold ETFs in July ... supporting our theory that the UK's exports in 2013 have been of sold ETF gold," he said in a report.

Asia is by far the world's largest centre for physical gold demand, with China and India between them responsible for nearly half of global gold fabrication demand, which includes jewellery manufacture.

Buying in Asia shot higher in the second quarter of the year after a sharp drop in gold prices, which spurred consumer demand.

"Given the outflows from ETPs, strong demand in Asia and refining capacity in Switzerland, it is possible the metal is headed for Asia through Switzerland," Barclays Capital analyst Suki Cooper said.

REVERSAL OF FORTUNE

Investors are dumping gold due to fears that a withdrawal of U.S. monetary stimulus measures will ease fears over soaring inflation and take pressure off long-term interest rates, lifting the opportunity cost of holding non-yielding gold.

Rising prices of stocks and other assets have also been offering investors better alternative investments to gold, analysts say.

The SPDR Gold fund alone has seen outflows of 465 tonnes of metal this year. Its holdings are at a 4-1/2 year low, having declined by around 35 percent from their December 2012 peak.

"I suspect we'll continue to see a downtrend (in ETF holdings)," Citi analyst David Wilson. "I fail to see any real reason for building gold positions from an investor perspective, particularly if we think the strengthening dollar trend is likely to return."

Analysts say hefty outflows from ETFs have weighed heavily on spot gold prices, which are down by more than a fifth this year and on track for their first annual drop since 2001.