By Sarah Benali of Kitco News

Tuesday January 13, 2014 8:55 PM

(Kitco News ) - Holdings of gold-backed exchange-traded products closed off the year on a negative note; however, ETF Securities said the resilient gold price so far this year, among other factors, may be hinting at a bottom for the metal.

Despite substantial gold and silver ETP outflows last quarter, Mike McGlone, director of research for ETF Securities, said gold prices were barely down potentially indicating a foundation, forming near the US $1,200/oz level.

McGlone also noted that declining global bond yields are increasing the store of value attraction of the precious metals sector for investors, adding that gold has outperformed the other precious metals so far this year.

Gold was the best performing precious metal in the first full week of the New Year, gaining 3.9% as geopolitical fears supported defensive assets like bonds and precious metals, he said.

According to McGlone, gold recycling, which accounted for roughly 37% of total gold supply over the past five years, may also be providing support for the metal.

With recycling having fallen to the lowest level since Q3 2008, it should help support a floor below which gold is unlikely to fall without triggering a further loss in supply, he said.

One major concern for gold investors this year, however, is the U.S. Federal Reserve rate hikes, which many expect will occur in June of this year; but, McGlone said that current market conditions suggest that this may not come into fruition.

It seems an oxymoron that the fed would hike rates in such an environment of increasing global and domestic deflationary risks involving rapidly declining bond yields, plunging crude oil prices, the strengthening US dollar and lack of labor wage growth, he said.

The number one reason to raise rates historically is to limit inflation. Increasing inflation risk in the US, by most traditional measures, appears to be tilted more towards deflation currently, he added.

Finally, McGlone said that despite substantial outflows in 2014, he expects gold and silver ETP flows to shift into positive territory this year given the substantial price discount, the need for sound liquid alternative assets, and the potential for market volatility normalization.

By Sarah Benali of Kitco News sbenali@kitco.com

Follow me on Twitter @SdBenali