Gold has been bought as a recession buster and as an asset to hold during global low-interest rates over the last year. However, the announcement of the Pfizer vaccine on November 9 sent gold plunging lower and the gold futures markets had the largest single-day loss in 7 years. Why? A return to normal life will bring higher interest rates and gold will not be so attractive when interest rates rise.

Gold’s outlook

The outlook for gold is still good for buyers. The Federal Reserve is planning on keeping interest rates low until 2023 and low rates are supportive of gold.

However, timing is the issue here.

A possible gold long into year-end on strong seasonal demand from around December 26/27 would tie in with a pick up in seasonal demand from China. One signal to look out for is the end to outflows from gold ETFs. Remember, during the crisis, the slack from a drop in jewellery demand was picked up by ETF flows. Here is what they are saying:

1. According to a Bloomberg terminal piece from last week, gold ETFs has just recently seen their longest run of declines since Trump’s victory in 2016. Since October there has been $7.9 billion worth of outflows, so there is no sign of outflows slowing. As you can see from the chart above, they are increasing.

2. Remember that ETFs have a large impact on prices. One week’s flow in ETFs gives a very good indication of what happens next in terms of gold spot prices. As buyers of physical metal, they have a greater impact on market tightness than the futures market according to Bloomberg. So, ETF flows matter for a spot price. They are not the only influence, but a key one.

3. With point 2 in mind, since the invention of gold ETFs in 2003 holdings they have moved in the same direction as price in every year bar one.

4. ETF flows tend to trend (see chart above) so, this means selling could last for months.

In summary, it is right to look at the ETF flows for a hint at where gold is heading. The ETF sector has a lot to sell, the movement in ETFs show a propensity to trend, and they often have the largest impact on prices.

A slowing in gold-ETF selling heading into the end of December is the message I need to re-engage gold longs. Until then, the best plan seems to be to listen to the gold ETF message and stay neutral.