Paper Gold Trading Drops in Q1, Negative Inflow for First Time in 2 Years

The OTC investments in gold papers decreased for the fourth quarter in a row during the three first months of 2011, the latest report from World Gold Council show. Investments in gold EFT’s and similar products fell by 56 tonnes in Q1, equaling a net outflow from the funds of more than USD 2,5 billion.

Notably, EFT’s listed in the US and the UK markets experienced net redemption in the first quarter.

World Gold Council

In spite of a fresh all-time-high for the gold price, the capital flow in the markets for ETF’s, and similar gold related investment products, is negative the first time in two years. The outflow in Q1 is almost as big as the inflow in Q4 2011.

But the gold market works in mysterious ways, so what’s actually going on is kinda hard to say.

One thing is for sure, the central banks are buying gold as never before.

But besides Japan, no one is selling.

In the open market, that is.

Most of the trading is done in the non-transparent OTC market.

By who? you might ask.

Well, your guess is as good as mine. This is what the World Gold Council wrote in their April Gold Investment Digest report:

The majority of gold trading takes place in the global over-the-counter (OTC) wholesale market for physical bullion.

While OTC markets are the deepest and most liquid markets in the world, information about transactions is not always fully accessible to the public as they are conducted outside of regulated exchanges.

However, evidence suggests that trading volumes in the global gold market is quite large; in-line with or larger than trading of other high-quality assets such as sovereign debt.

The London Bullion Market Association (LBMA), through surveys of its members, estimates that the daily net amount of gold that was transferred between accounts in 2010 averaged USD 22 billion (based on the average 2010 gold price).

However, in practice, trading volumes between the bullion banks are significantly higher.

Most banks estimate that actual daily turnover is at least three times that amount and could be up to ten times higher.

This would value global OTC trading volumes anywhere between USD 67 billion and USD 211 billion.

During the first quarter of 2011, figures from the LBMA show that activity in the OTC market mirrored that of ETFs and futures.

Volumes rose during the January consolidation to an 8-month high of US$26.1bn/day before subsiding in February as prices recovered. Assuming a continuation of this pattern, indications from ETF and futures markets are that OTC volumes picked up again in March as gold prices maintained their
steady climb, the WGC wrote in last months report.

Well, here’s today’s update:

The April report seem, in fact, more interesting now, after the release of the May report.

Here’s some more:

Activity in the ETF options market remains robust, which continues to offer alternative strategies for investors. The majority of the volume in these products is still being transacted by way of GLD options. In line with some of the outflows experienced in the ETF market during the quarter, GLD options volumes dropped in Q1 2011 on a quarter-on-quarter basis. However, at an average daily volume of 234,724 contracts during the first quarter, trading volumes remain higher than the daily average of 208,131 contracts during the whole of 2010. In general, call option volumes remained higher than put volumes during the period. Similarly, open interest on call options accounted for the majority of traded contracts, at an average of 2.1 million contracts in Q1, compared to 1.7 million put contracts. However, open interest in call options fell further relative to Q4 2010 than the open interest in puts, as investors likely exercised some of those calls as the price of gold fell in the early part of the year.

And here’s some of the most interesting charts from today’s release, Gold Market Trends, May 2011.


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