Record gold price deters investors

The price of gold reached another record high of USD 1,457 per ounce earlier this week. We look at securities lending fund flow to gauge sentiment towards a selection of consumer facing companies with exposure to gold and some of the largest Gold ETFs including: The Swatch Group Ltd. (VTX:UHR), Compagnie Financiere Richemont Sa (CH Equity (SMI), Pandora A/S (CPH:PNDORA),Tiffany & Co. (NYSE:TIF), SPDR Gold Trust (NYSE: GLD) and iShares S&P TSX Global Gold Index Fund (TSE:XGD).

The surge in the price of gold was attributed to a combination of the slide in the US Dollar to 14-month lows against the Euro ahead of an anticipated rate rise by the European Central Bank, on ongoing concerns over the health of European sovereign debt and unrest in the Middle East and Africa. The Telegraph noted comments from World Gold Council that the price of gold had risen in line with the price of oil and that investors value assets with strong wealth preserving and diversification characteristics as well as relatively low volatility.

Turning our attention to some consumer facing companies with exposure to Gold, Danish charm bracelet jeweler, Pandora A/S floated last autumn and has seen margins squeezed because of the rising price of gold. The Wall Street Journal reported that the shares slid by a third when the company warned on growth expectations in March. Short interest began to build at the beginning of the year and quadrupled to a new high of 6% of total shares outstanding on loan in March, following the profits warning. This represents 40% of the supply of stock that is available to be borrowed from long only funds who lend.

Tiffany announced stronger than expected Q4 results in March, although it warned on exposure to Japan, which accounts for almost 20% of sales. Shorts have aggressively covered positions in Tiffany since the high last September of 15% of total shares outstanding on loan. Short interest fell to below 3% in early March before gaining some momentum in recent weeks to reach 4.5% of total shares outstanding on loan. Perhaps this is a reflection of rising precious metal prices?

The world’s largest watchmaker, The Swatch Group Ltd, owns a range of brands across the full price spectrum, including Omega. The CEO confirmed double-digit growth expectations for the first half of the year, in local currency. However, Reuters reported comments by the MD of the group’s affordable luxury brand, Tissot that confirmed margins were being squeezed due to the rising price of gold. As a result, Tissot intends to make fewer watches as price increases cannot be passed on to clients. Short interest has doubled since January to just below 4% of total shares outstanding on loan. Meanwhile, rival Swiss watch manufacturer, Compagnie Financiere Richemont Sa, has seen short interest decline since March from 2.25% to 1.5% of total shares.

Turning to some of the most popular Gold ETFs, as the share price of the SPDR Gold Trust (ETF), the largest gold ETF neared an annual high, ConvergEx was quoted in ETF Trends noting that investors had pulled about USD 3 billion in the last quarter. Short interest is low, at 1.5% of total shares outstanding on loan, but has oscillated between 0.5% and 2.75% over the past three months. During this time, long only funds who lend reduced their holdings by 15%.

Another popular gold ETF is iShares S&P TSX Global Gold Index Fund which has seen a 50% increase in the percentage of shares outstanding on loan since the beginning of February to 3%, as short sellers have followed its shares price. Long only funds who lend have reduced their holdings by almost 20% over the period.