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After twelve consecutive years of increases in the gold price,
exchange-traded product (
) investors may have expected some kind of market correction. But
the speed and extent of the metal's spring sell-off still took many
people by surprise.
And 2013 has been a traumatic period for the whole commodity
tracker market, the lion's share of whose assets is in gold.
During the six months, gold ETPs lost more than 20 percent of
their assets under management:ETP holders redeemed $19 billion of
gold trackers in the second quarter, following $9 billion of sales
in the first quarter.
And while commodity ETPs have seen a fall in assets before, most
notably during the financial crisis of 2008, when the prices of
many raw materials collapsed, gold had historically held up well in
comparison. This year, things changed.
According to ETF Securities, which specialises in providing
commodity trackers to investors, the about-turn in gold prices was
signalled by a rise in US real interest rates that began late last
'We've seen inflation expectations in the US fall and nominal
interest rates rise,' the firm's head of research, Nick Brooks,
'As a result, real interest rates have shown quite an aggressive
change in direction since October 2012. Unsurprisingly, that's also
coincided with a rise in the dollar. Tactically, this is possibly
the worst environment for gold you could imagine.'
ETF Securities has mapped the change in real interest rates in
the chart below, which we have reproduced with the firm's
permission. The gold price (in yellow, recorded on the left scale)
is shown together with US 10 year real interest rates, as derived
from the market for inflation-protected treasuries (in red,
inverted, on the right scale).
Real US interest rates, which had spent most of the time in
negative territory since late 2011, switched back to positive in
the second quarter, reflecting a drop in long-term inflation
expectations and a rise in ten year bond yields.
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