Is the Recent Pullback in Gold Only a Passing Phase?

Despite the pullback in precious metal prices over the past few days, there's been alot of power behind this sector's rally this year.

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Gold has gained 20 percent, silver has surged over 50 percent and the run-up in palladium—an incredible 60 percent increase year-to-date—has surpassed every other commodity. Is this recent correction just a pit stop as the metals market continues to post multiyear highs into the new year? That'll be the key topic of discussion at the annual ETF Securities Precious Metals Conference in New York on Thursday.

There have been major macroeconomic factors driving this rally, namely the anticipation—and then announcement—of more quanitative easing by the Federal Reserve and the subsequent negative impact on real interest rates and the U.S. dollar.

But some of the conference speakers see more opportunities ahead for the precious metals market.

"Excess liquidity provided by QE2 is also a positive for precious metals," says Francisco Blanch, head of global commodity research at Bank of America Merrill Lynch. "Prices in our view are set to rise further next year."

Investment demand, specificially demand for exchange-traded funds, may have also played at least a marginal role in the dramatic increase in precious metals prices.

"Certainly the proliferation of a number of physically backed precious metals ETFs has given a larger chunk of the investing public the ability to get their hands on an asset class that they forsee will be able to store their value and serve as a safe haven against any inflationary environment to come," says Abraham S. H. Bailin, a commodities ETF analyst at Morningstar.

As commodity ETF assets have grown 40 percent over the past year, the SPDR Gold Trust has garnered $6 billion in inflows, according to the National Stock Exchange. Total assets in GLD are now at $55 billion dollars, making it the 2nd largest ETF in the world with nearly 63 percent of all commodity ETF assets in this one fund.

Yet data released this week from the World Gold Council shows that gold ETF demand in the 3rd quarter actually fell 7 percent from its spectacular surge in the previous quarter, even as the market contemplated the impact of QE2. Some of the most bullish predictions on Wall Street forecast gold prices going to $1,650 or higher next year, but the $100 slide in gold prices in less than a week may have some investors wondering if some of the air is coming out of a bubble.

How much will investment demand, including ETF demand, continue to play a role in price action and could ETF investors give us an indication of where gold and other precious metals prices may be headed? One of the leading sponsors of commodities ETFs in the past year has been ETF Securities. The firm now has five ETFs—for gold, silver, platinum, palladium and a precious metals basket—totalling $2.4 billion in assets, up from just $339 million a year ago and more than 7 times last year's assets.

Experts from the ETF Securities as well as the GFMS, one of the world's foremost precious metals consulting firms, and other industry leaders will be on hand provide insights from the conference.