"The decline in ETF positions represented a significant headwind to prices last year even as physical demand remained high"

Eoin - when ETFs are "redeemed" this releases physical gold into the market which is just what the bullion banks want/need. They have supplied gold that wasn't theirs to sell (fractional reserve banking works with gold too) and this is one of the ways they get to exit their "shorts" in the physical which is still as rare as hens teeth in large size. Regardless $1200 looks to be a crucial level if we are not to see $1000 in pretty short order. The ranging price action might say otherwise but look at the chart upside down and ask if you would be a buyer or a seller. Best wishes to you and David 

Eoin Treacy's view

Thank you for this comment which was posted following my article on ETF holdings of gold from May 21st and for your well wishes which I will pass on to David. You can create an inverse chart of the gold price in the Chart Library by following these steps.

1. Select gold from the menus or via the search.
2. Click on the Charting tab, located directly above the chart area.
3. Check the (1/data) box in the lower right of the subsequent dropdown area.
4. Hit Apply.

Until today one could have argued the developing triangular short-term pattern could have been resolved to either the upside or the downside. Today’s clear downward dynamic  opens the way for a retest of the lower side of the developing range near $1200 and a countermanding move in the next day or two would be required to check this potential.

One can argue that lending practices of bullion banks are the precious metal equivalent of fractional reserve banking because of the leverage they facilitate. As a result the number of contracts outstanding far outnumbers the global supply of the metal at any given time. Another way to look at this process is as the equivalent of stock lending. Passive lenders can earn an additional return by lending out their supply to those wishing to express a bearish view. Generally speaking when that stock is called back it forces a short covering rally as borrowers scramble to locate supply in order to make delivery.

The liquidation of institutional long positions contributed to last year’s decline in gold prices and the squeezing of leverage from the system. This also afforded those willing to buy physical gold an opportunity to do so. There is no denying that physical supply in any size is becoming increasingly difficult to come by. I’ve spoken to a number of potential buyers who corroborate this view. However the price of the metal and ability to supply it are not quite the same thing because of the effect of futures, leverage and hedging on the market.