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The World Gold Council's quarterly Gold Demand Trends report goes a long way to explain why gold prices aren't going to rebound any time soon. Large-scale institutional investors have abandoned ship.

The council reported that global gold demand in the first quarter, by tonnage, was down 13 per cent from a year earlier and 19 per cent from the fourth quarter. This despite solid gains in demand for gold jewellery, bars and coins, as retail buyers were attracted by lower gold prices.

The culprit? Gold exchange-traded funds (ETFs) sold a net 177 tonnes of gold in the quarter – by far the biggest quarterly outflow from ETFs in history. (Granted, it's not that long a history – gold ETFs have only been around since 2004 – but in that time, ETFs have only reported quarterly outflows twice previously.) In a single quarter, gold ETFs shed roughly 7 per cent of their total holdings.

(Funds are forced to sell gold when investors cash out of the fund, since a fund's underlying gold holdings must be kept aligned with the total size of its investor assets under management.)

The WGC noted that individual investors still show plenty of interest in gold. They're the ones buying the gold bars and coins, which saw a 10-per-cent rise in demand in the quarter. The ETF plunge, the report concluded, reflects big institutional money reacting to gold's price drop by dumping their ETF holdings.

Regulatory filings released by the U.S. Securities and Exchange Commission this week supported that conclusion. Big-name money managers Soros Fund Management LLC, BlackRock Inc. and Northern Trust Corp. sharply reduced their holdings in the SPDR Gold Trust, the biggest U.S. gold ETF, in the first quarter.

The WGC, essentially an advocacy group for the world's gold industry, is quick to point out that ETFs account for just 1 per cent of all the above-ground gold in the world. Five-year average demand from ETFs amounts to less than 10 per cent of total world demand.

Yet it's no accident that the meteoric rise of gold ETFs came at the same time as gold's greatest bull market in history. The emergence of the ETF created an entirely new pool of demand that hadn't previously existed. It also created a new and highly efficient avenue for a much larger element of speculative investment in gold; that, too, played a key role in gold's record run.

But speculative heat can come back to burn you, and gold is now seeing the downside of having an expanded investor component to your market: when those investors lose interest. Once the big money turns its attention to a new favourite asset, it can take a very long time before it comes back. And frankly, in the absence of steady growth in ETF demand, a major pillar in the gold fundamental supply-and-demand story simply isn't there to prop up prices anymore.

David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow him on Twitter at @ParkinsonGlobe.

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