Alongside the falling gold price we have watched shareholders in the U.S. gold ETF, SPDR selling nearly 100 tonnes of gold over the last few weeks. The selling of gold has come from the U.S. and mainly seen at the Fixes in London at 10.30 a.m. London time or 3.00 p.m. When shareholders sell their shares the custodian HSBC is tasked with selling the fund's gold holding against these sales. As one of the five members of the Gold Fixing in London, where 90% of the world's physical gold is traded, this would be the ideal market in which to sell this gold. This is why the two daily Fixes are where the current gold price is being made. But why are U.S. gold Investors in the SPDR gold ETF selling their gold [shares]?

Selling from the SPDR gold ETF

The main shareholders in the SPDR gold ETF are U.S. institutions or wealthy individuals. The holdings in the SPDR gold ETF have, since its inception, steadily risen with barely 1% of the holders selling at any time. That is until the last few weeks. We have seen around 7.5% of the holding sold, but with the occasional large buy order going in [20 tonnes at one point] then overwhelmed by more selling.

Possible reasons why

There is no way sellers would come out into the open and state why they had bought or why they had sold their shares, except to say they felt it was time to buy or time to sell. We therefore have to look at the possible reasons why they have done so. Here are some of those reasons: -

• There is growing confidence in the U.S. economy accompanied by the belief that this will allow interest rates to rise, making U.S. fixed interest securities more attractive than gold. The comments from the Federal Reserve scotched those reasons saying that the recovery was disappointingly slow.

• The warnings to the U.S. and Japan given by ratings agencies and the I.M.F. that they must urgently cut their deficits or be in danger of downgrading [Japan has been already], could lead to lenders looking for higher returns on Treasuries, which would ripple into the U.S. interest rate picture. Higher interest rates may lead to a belief that the dollar will be more attractive against gold. We would comment that interest rates rising, to contain overheating, is healthy, but interest rates rising because of poor credit ratings is an entirely different matter.

• Technical picture points down. We find that some Technical analysts have been calling a top has been made and gold has had its day. Other analysts state this is just a correction and a subsequent rise will follow. You pay your money and you make your choice.

• Large U.S. investors are selling these U.S. based shares, whose gold is in the hands of a bank [licensed by the Fed] that could if required to do so, under a 'confiscation order', hand the gold to the Fed, to buy physical gold bullion overseas for safer keeping. This may well be so. However, the fall in the price of gold implies that these positions are being closed out.

• U.S. institutions may well feel that the equity market will discount a recovering future and present better opportunities than gold does from now on. U.S. investors are more inclined to the optimistic way forward, however a glance across the potential damage the growing sovereign debt crisis could inflict points to more of what we've had in the last three years. While markets are not, in our view, in danger of collapsing, nor are currencies, we find it difficult to overlay a rosy hue on the future.

How does the rest of the world feel about gold?

• Certainly Asia continues to believe that gold is real money and want to buy it for financial security. Their growing buying power implies that they may well prove to be the dominant force in the gold market from now on.

• Central Banks will continue to buy for their reserves. This week Russia announced that it will be buying 100 tonnes of gold per annum going forward. This may well err on the low side for Russia has been buying more than that for the last two years from growing local production.

• We are of the opinion that the People's Bank of China is following the same course but hidden from the public's eye.

• Jewelry demand is rising back to the levels seen in the past, making up the single largest element of demand in the gold market.

• Europeans have been buyers of gold in the last year as the prospect of a Eurozone default could have endangered the euro itself. We do not believe that the danger has passed but some European institutions may well feel that. They may have had holdings in the U.S. SPDR gold ETF, believing liquidity is better there.

• Industrial and Technological demand is rising steadily and will continue to do so for gold, although only a small but critical part of new devices that is price insensitive.

Overall we believe that the fundamentals of gold remain extremely positive.

So where next for the Price of Gold?
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