ETF Outflows Overshadowing Strong Physical Gold Demand: Ex-US Mint Director
Forbes | By Debbie Carlson of Kitco News
The outflows from the gold exchange-traded funds this year are masking strong physical demand, says a gold strategist and an ex-director of the U.S. Mint.
As of beginning of the week, ETF outflows for the year were 141 metric tons, said Barclays, while U.S. Mint sales of gold coins have been strong, at 265,000 ounces so far this year, versus 210,500 in the first quarter of 2012. The firm noted halfway through March, gold-coin sales were 34,500 ounces, which is already the more than 50% of the full month sales in March 2012.
The difference in demand shows dichotomy in the market, said Edmund Moy, chief strategist for gold-backed IRA provider Morgan Gold, and a former director of the U.S. Mint.
The data show that at the micro level, demand for gold is strong, as it is for silver, he said. Weaker prices for gold have prompted some selling out of ETFs, while the weaker prices may have encouraged some physical buying, gold market sources have said. Moy added that gold prices are likely to remain volatile.
“Because of our fiscal situation and because of the worldwide economy, there’s going to be greater volatility in the price of gold. But as long as the (U.S.) deficit is rising,” gold prices will rise, Moy said.
“Longer term, what a lot of gold investors do not understand is that the gold price and demand is (affected) by the debt ceiling and how close we come to hitting it. The correlation is lock-step,” he said.
Quantitative easing by the Federal Reserve had a huge impact on gold demand, he said. “If you look at the debt ceiling, which is $16.4 trillion, move the decimal point over 10 steps and you get $1,640, so that shows you that the gold price is about right where it should be,” Moy said.
The last time the U.S. was about to hit the debt ceiling, the debt ceiling was $14.5 trillion and “gold was right around $1,450,” he said.
Since the amount of debt that the U.S. accrues is growing, he said it’s likely that gold prices will continue to rise. That would only change if efforts were made to reduce the deficit, he said, but he added while the deficit may eventually be reduced, it’s unlikely ever to be eliminated.
The situation in Cyprus helped to push gold prices over $1,600 an ounce on Monday, as European officials seek to tax bank depositors in exchange for bailout funds. Some in the gold market were surprised that gold prices didn’t rally more strongly on the news.
Moy said that he could only speculate on why that gold prices didn’t rally further, saying part of it might be the shock of the announcement, as previously depositors’ funds were always considered off-limits. Further, for anyone whose gold was stored in the bank safe deposit boxes, that metal would be considered another asset to tax.
U.S. MINT TERM HIGHLIGHTS INCLUDE REISSUE OF ST. GAUDENS COIN
Moy was director of the U.S. Mint for about four and one-half years, from September 2006 to January 2011.
His term is best known for introducing the one-ounce, 24-carat gold double-eagle St. Gaudens coin as the designer originally created it. The original St. Gaudens double eagle was produced by the U.S. Mint between 1907 and 1933 and created by Augustus St. Gaudens and is considered one of the most beautiful of U.S. coins.
St. Gaudens’ original design was modified because the ultra-high relief was lowered so the coin could be struck more easily. For the 2009 release of the coin, Moy said he went into the Mint archives and found the plaster cast that most captured Gaudens’ original work.
Congress mandates coin design and there is always a buffalo nickel design, but there is often the opportunity to introduce another coin. Moy said he knew many members of Congress and they settled on the design ahead of it coming up for official approval. The release of the new St. Gaudens coin was hugely popular, he said.
