LONDON (Commodity Online): The greatest downside risk for gold prices arises from ETP interest, which has tended to reflect longer-term, “stickier” investor interest, according to a market analysis by London based Barclays.

Gold ETP flows turning negative pose the key downside risk for prices. ETPs recorded their largest monthly outflow in February, with net outflows on a global basis.

Indeed, last year, despite hefty price corrections, ETP holdings remained relatively robust and drew fresh interest on price dips.

Metal held in trust started the year at a record high 2,767 tons, but since then, holdings have declined. Across both open- and closed-end funds, holdings were relatively flat in January (open ended: 18 tons), but February marked the largest monthly outflow across physically backed gold ETPs.

Barclays estimates show net redemptions hit a record high 111 tonnes across the 55 open- and closed-end funds track. This surpasses the previous record for net redemptions set in January 2011 (open-end: -65 tonnes) by 45 tonnes (70%).

On a regional basis, the bulk of the redemptions were in primary US-listed products, with the largest gold ETP, SPDR, down 74 tonnes; with the exception of some smaller products, all regions saw net outflows.

Holdings continued to dwindle in early March and are down over 14 tons. Although the macro environment remains supportive for gold given low interest rates, concerns over currency debasement and medium-term inflation, better macro data and an improvement in the equity markets has weighed on prices and ETP holdings to the same extent as in January 2011.

In contrast, equity market under performance, such as in July 2011, alongside the debt ceiling debate, supported gold ETP demand, but the correlation between the S&P 500 and gold has weakened, and now the appeal of alternative yield-bearing assets is likely to cap interest in gold in the near term.

In recent weeks, as the S&P 500 rose to levels last seen in 2007, gold ETP outflows gained momentum. Furthermore, prices below $1600/oz have prompted net redemptions in the past, notably in December 2011, May 2012 and July 2012.

Prices below $1550/oz in the first instance and then below $1500/oz expose ETP holdings more so given the net 200 tons accumulated above these levels, stated Barclays.

The physical market has responded to the lower price environment, and official sector activity remains on the buy side, but this strength not only needs to persist but to grow to offset potential ETP outflows.