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Record ETF Demand Driving Gold Higher

It’s safe to say that this year, gold has lived up to its reputation. Regarded by many as a safe haven, the yellow metal has acted as just that, rising in value as stocks and other commodities have fallen. The $52 billion SPDR Gold Trust (GLD), the world’s largest gold ETF, is up 8.2% year-to-date, comparable to the 9.9% return for the iShares 7-10 Year Treasury Bond ETF (IEF) in the same period.

GLD closely tracks spot gold prices, which crossed $1,700/oz for the first time since 2012 in March. They were last trading around $1,650/oz, up from $1,517 at the start of the year.

For proponents of gold, there is nothing surprising about the way the metal has acted this year. Investors who own gold do so for times like these, when economic uncertainty is high and financial market volatility is great.

It’s under these circumstances that gold often outperforms, much as Treasuries tend to rise when economic prospects dim. Gold has also gotten a shot in the arm from plunging interest rates, which have reduced the opportunity cost of holding the metal compared to government bonds.

Holding Tight

This week, stock markets have rallied strongly on hopes that the coronavirus can be contained and economies can be reopened sooner than expected, but investors still aren’t letting go of their gold. In fact, they have been adding to their positions to hedge against any further economic surprises or downdrafts in financial markets.

Since the start of the year, investors have added $7.7 billion to U.S.-listed gold ETFs, including $4.8 billion and $1.8 billion, respectively, to the popular GLD and the iShares Gold Trust (IAU).

The smaller SPDR Gold MiniShares Trust (GLDM), Aberdeen Standard Physical Gold Shares ETF (SGOL) and the GraniteShares Gold Trust (BAR) have also seen strong interest. They are among the cheapest gold-backed ETFs on the market, with expense ratios between 0.17% and 0.18%, less than the 0.4% price tag for GLD and even the 0.25% annual cost for IAU.

Gold ETF Demand

Record Holdings

The strong demand for gold ETFs has pushed the amount of physical metal held by such funds to a record high. Nearly 92 million troy ounces of gold are currently held by gold-backed exchange-traded funds worldwide, according to Bloomberg, about 10 million more than was held during the previous peak in 2012.

Separately, the World Gold Council reported that the dollar value of gold purchased by ETFs during the first quarter of this year—$23 billion—was a quarterly record.

In addition to the $7.7 billion that’s flowed into U.S.-listed gold ETFs, billions more flowed into ETFs listed in the U.K., France, Switzerland, Germany, China, Australia, Ireland, India and Italy, World Gold Council data showed.

Mainland China2.6349.7
India 1.1193.2

Source: World Gold Council

ETFs The Marginal Buyer 

The data suggest that gold in general, and gold ETFs in particular, have global appeal. In 2019, another strong year for gold ETF purchases, demand from the segment made up 7.5% of total worldwide gold demand.

This year, ETFs are on track to be an even greater share of the market, especially as other segments of demand struggle in the global recession.

Demand for physical gold coins and bars is also expected to make up a big share of total demand this year, rebounding from a sizable drop in 2019. Premiums of 10% to 15% over spot prices have been reported for the small gold bars and coins that are popular with retail investors, according to Bloomberg.

Together, demand from gold ETFs and physical bars and coins will likely be the key drivers of gold prices this year. On the other hand, jewelry demand and purchases by central banks may suffer as economic headwinds weigh on key buyers in China, India, Russia and elsewhere.  

Email Sumit Roy at [email protected] or follow him on Twitter sumitroy2

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