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Gold Coins, ETFs Moving In Opposite Directions: Why?

The gold price fell in a monumental way last month with a dive from above $1600 to below $1400, and has had more than a handful of days since then where the price fluctuated either up or down by more than $20 per ounce, which represents approximately a one percent movement. Gold Coin market analysts have been working overtime (literally, believe me) to figure out what is causing such significant changes, and the results are in.

A disconnect between the gold coin market and the gold derivatives market has become evident. For example, the world’s largest gold exchange traded fund (ETF) SPDR lost almost 143 tonnes in physical holdings in April. This represents a loss of $6.6 billion and it is the largest monthly outflow from that ETF since November 2004.

In contrast, sales of American Eagles and other gold coins have risen sharply during the same time. In fact, the U.S. Mint could meet or surpass annual records in terms of sales volume of American Eagle gold coins this year, if it does not run out of blank gold rounds first. That could happen, as the Mint has already suspended sales of one-tenth (1/10) ounce gold Eagle coins. Nevertheless, in April the U.S. Mint tallied the highest monthly sales of gold Eagles coins since 2009 and noted that this was a 118 percent increase in sales over April 2012.

What is causing this “see-saw” effect between physical gold and paper gold?

“It’s been primarily the financial component that has been selling. I don’t think that we have seen a lot of small holders changing their view on gold,” said Nicholas Johnson, a portfolio manager who helps manage the $30 billion in commodities at PIMCO in Newport Beach, California.

Indeed, the numbers don’t lie. Household investors, smaller banks and investment firms have been adding gold coins and bullion to their portfolios heavily for the last month or two, while institutional investors and large brokerage houses have been shedding ETFs, pool accounts and gold futures contracts. Larger buyers are historically more interested in profits than safety, whereas the average American investor simply wants to protect his or her money from inflation and have something on hand in case of an entire economic collapse.

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