Gold fund exodus to sink holdings to lowest since 2008 next year

* Further liquidation seen in 2014 as economy improves

* Gold (Other OTC: GDCWF - news) -backed ETFs lose $36.4 billion in 2013, BlackRock (NYSE: BLK - news)

By Clara Denina

LONDON, Dec 16 (Reuters) - An unprecedented exodus from gold-backed exchange-traded funds is expected to push global holdings next year to their lowest since the 2008 financial crisis, as an improved outlook for the world economy weakens the investment case for bullion.

Gold exchange traded products (ETPs) have had record outflows of $36.4 billion in the first 11 months of the year, according to data from asset manager BlackRock, marking the first recorded net yearly outflow for gold.

Exchange-traded products, which issue securities backed by physical gold, have proved a popular way to invest in bullion since their inception in 2003.

But this year's biggest annual gold price fall since 1981 put an abrupt end to 12 straight years of growth. The price fall reflects expectations that economic recovery will bring an end to monetary stimulus by central banks and higher real interest rates against a backdrop of low, or lack of, inflation.

As the biggest single product in the commodity ETP space by asset volume, gold was a significant drag on the sector's growth - $37.3 billion was pulled globally, making 2013 one of the worst years on record.

The largest gold fund, New York's SPDR Gold Trust, which accounts for around 40 percent of total ETF holdings, saw a record outflow of 460 tonnes, or 39 percent, to around 850 tonnes. This coincided with a more than 25 percent slide in gold prices so far this year.

Liquidation continued even as the gold price stabilised between $1,200 and $1,300 an ounce from the second quarter's hefty price falls and central banks around the world - notably the U.S. Federal Reserve - kept monetary stimulus such as quantitative easing in place.

"We could go potentially to around ... the level ETFs holdings were before unconventional policy started in late 2008 ... thinking that the U.S. economy has normalised," Standard Bank analyst Walter de Wet said.

"We expect a liquidation of somewhere between a third and 50 percent of the holdings -- around 800 tonnes from here."

FED POLICY

The gold community has proved particularly sensitive to changes in U.S. monetary policy. The Fed's May policy meeting, which cast doubt over the scope of its stimulus plan after signs of economic recovery, led several banks to cut price forecasts and investors to reallocate out of bullion into equities. U.S. equities hit all-time highs in 2013.

Brightening economic conditions in 2014 are unlikely to tempt investors to come back. As the Fed prepares to turn off its liquidity tap - so called tapering - fund managers will continue to reverse years of gold ETP buying.

"From our prospective, the first few months of 2014 will be still very much shaded by this fear of tapering and the impact that it will have on financial investor behavior and the potential to see further selling out of the ETFs," BlackRock (Berlin: BLQA.BE - news) portfolio manager Catherine Raw said.

This contrasts with 2009, when exchanged-traded products posted record inflows of 623 tonnes, according to the World Gold Council, as investors sought a safe haven following the collapse of Lehman Brothers and the onset of the global economic crisis.

Investors which buy gold for diversification and capital gains have become more negative on the gold price, ABN Amro analysts said, predicting that they will continue to liquidate because they can no longer bear the opportunity, capital and income loss associated with holding gold.

"The outlook for gold ETPs is going to depend very much on the macroeconomic environment in 2014 and currently the almost unanimous consensus expectation is continued strong recovery of the U.S. economy, higher interest rates yields and a strong dollar," Nicholas Brooks, head of investment strategy at ETF Securities, said.

"On that basis, it is unlikely that the gold price will perform very well and if the gold price does not perform well there is not going to be strong demand for gold ETPs."