The great gold, silver ETF year-end liquidation sale

As per usual trade in silver was more volatile and further exacerbated by thin holiday volumes. March contracts gave up 2.2% or $0.36 to $15.79 compared to Friday’s close and down sharply from a day high of $16.26 an ounce.

Gold is set to end 2014 not that far below its opening levels of $1,205, but sister metal silver is having another terrible year – down more than 20% year to date.

Roughly 60% of silver demand is from industry, with investment and jewellery demand making up the remainder, and the silver price has been dragged down by weakness in other industrial metals like copper which is destined to end the year at near four-year lows

Despite a resilient gold price during the year, investors in exchange traded funds backed by physical gold continued to lighten their exposure to the metal throughout the year.

At 1,600 tonnes as at December 26, holdings in the dozens of gold-backed ETFs listed around the globe, are now down to levels last seen with the collapse of Lehman Brothers in September 2008.

Gold bullion holdings in global ETFs hit a record 2,632 tonnes or 93 million ounces in December 2012, but last year saw net redemptions of 800 tonnes.

Retail investors in silver took a different tack to gold investors, stocking vaults at physical silver-backed ETFs to record levels in October at 20,182 tonnes.

But that trend has not thoroughly reversed. Last week investors pulled out 288.5 tonnes dropping holding to a 10-month low of 19,372 tonnes and the worst weekly performance since May last year.

In November Barclays noted the risk to the early money invested in the dozens of listed gold-backed ETFs across the globe.

Almost 900 tonnes (700 tonnes on a net basis) were acquired between $900 – $1,000 an ounce.

If the gold price were to fall to $1,000/oz, an additional 100 tonnes would become cash negative according to the UK bank.

The situation for silver ETFs are much worse, Barclays pointed out in the November research note:

“More than 9,000 tons of silver was accumulated above $30/oz on a gross basis and, taking into consideration net outflows, at least 7kt (7,000 tons) is loss-making at current price levels, assuming last in, first out. If we assume shares that have been redeemed were those first in, then 19kt of metals held in trust is loss making.”