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Gold tunes out weak ETF buying as speculation soars

LONDON (Reuters) - Gold prices are ignoring dwindling inflows into bullion-backed exchange-traded funds, with prices supported as investors switch their interest to the U.S. futures market and outright purchases of physical metal.

Investors are increasingly embracing riskier assets like stocks, leaving less of an impulse to hoard gold as a hedge against the unknown, lending support to its appeal as a buffer to dollar weakness and future inflation.

Consequently, while interest in gold-backed ETFs has tailed off after unprecedented buying in the first quarter, other forms of investment, such as positioning on the New York Comex futures exchange, have increased and underpinned a firm price.

Spot gold has held firm above the $900 marker since early May, with the psychologically key $1,000 level in reach.

“The slack created by slower ETF demand hasn’t gone away completely, it’s just been replaced by more speculative interest,” said Barclays Capital analyst Suki Cooper.

“The position on Comex has picked up quite sharply.”

Flows into gold ETFs hit a historic peak in the first quarter of 2009 as investors spooked by instability in wider markets went after physical gold as a safe store of value.

A combination of heavy selling of equities and very high credit risk made ETFs all the more attractive. But while equities are now bouncing from low levels, analysts say credit risk has fallen dramatically, denting inflows.

Almost 15 million ounces or some 450 tonnes flowed into the six gold-backed ETFs monitored by Reuters in the first quarter, worth more than $13 billion at the time. But as the financial markets started to stabilize, appetite for the funds slackened.

In the second quarter, inflows dwindled to less than a million ounces, with two of the largest ETFs monitored -- New York's SPDR Gold Trust and London-based Gold Bullion Securities GBSx.L -- registering small declines.

With the gold market still a relatively small arena where a few big players can have a disproportionate effect, it has not taken too much movement for overall ETF flows to dry up.

“Investing in ETFs is still a minority sport, and I guess maybe some of the funds investing think there are better options in other commodities, and even equities, due to a return to risk appetite,” said Matthew Turner, an analyst at VM Group.

HOLDING FIRM

Despite slackening ETF inflows, there seems to be confidence in the metal’s ability to move higher, with a recent poll of analysts’ forecasts conducted by Reuters showing an improved outlook.

Spot gold was seen averaging $930 an ounce in 2009, up from a forecast of $862.50 in January. <PREC/POLL>

At the time of the poll, analysts identified dollar weakness and the growing threat of inflation as chief reasons to buy gold. Both are seen as behind recent inflows into gold futures.

Noncommercial net long positions in New York gold futures jumped 9 percent in the week to July 21, a report from the Commodity Futures Trading Commission showed last week, and were at 173,302 lots against 166,294 four weeks earlier.

“Maybe investors feel they can get a bigger bang for their buck by going straight through to the over-the-counter or futures markets,” said Calyon analyst Robin Bhar.

ETF REVIVAL?

Some analysts say the market could be vulnerable to a clearout of COMEX long positioning, after the spot price saw a loss of almost 1.7 percent on Tuesday as a dollar surge prompted investors to lighten holdings in the U.S. futures market.

But a price fall may not preclude a future rise in ETF flows. Ashok Shah, chief investment officer at London and Capital, noted ETF exposure rising in a previous period of commodity price losses.

“It’s only a matter of time before we begin to see a real increase in order flow for underlying commodities and that will help to bring the interest back in,” he said.

While inflows are unlikely to return to the levels of early 2009, with the prospect of soaring inflation just around the corner, they still have plenty of scope to pick up.

“Let’s face it, when all the TARP (Troubled Asset Relief Program) money hits in the fall and other countries’ incentives bump up global money supply -- not forgetting where oil prices stand at that time -- people will want alternatives to currency,” said George Gero, vice president at RBC Capital Markets Global Futures in New York.

“The first such alternative is gold and things associated to it -- like ETFs,” he said.

Additional reporting by Veronica Brown in London and Barani Krishnan in New York

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