How ETFs and Investors Are Driving Gold Demand Over Central Banks

Commodities & Metals

Published: May 12, 2016 11:10 am

Last Updated: January 13, 2020 8:09 am

It is no secret that gold has seen a massive rally in 2016. The World Gold Council showed that the world’s gold demand rose a sharp 21% to 1,290 tonnes in the first quarter of 2016 (versus the first quarter of 2015). What should stand out here is that this was the second largest quarter on record for gold demand.

What has been different so far in 2016 is that the source of demand has been investors and exchange traded funds (ETFs) and similar vehicles. Positive investment flows helped to spark a 17% rally in the gold prices (in the United States), which was the biggest quarterly rise for almost 30 years. Prices have had a negative impact on jewelry demand, and technology’s demand trend remains continually muted.

Central banks had demand that was down 3% but was considered to remain a strong appetite. As a reminder, central banks have the ability above and beyond other groups to single-handedly and instantly create a massive order to buy or sell gold. Still, central banks just did not match any of the investment demand trends for gold.

The notion that demand comes from ETFs and other investment vehicles, as well as gold coin buyers, is a serious change. It brings the interest levels of gold back to recent years when gold was believed to be heading to $2,000 per ounce. 24/7 Wall St. has outlined how the top 10 gold ETFs by tonnes held that are dominating more than central banks.

What was interesting here about the ETFs, something the World Gold Council’s report does not address, is that the gold holdings in tonnes is likely much larger in mid-May than they even were at the end of the first quarter of 2016. The SPDR Gold Shares (NYSEMKT: GLD) was shown on May 12 to have some 841.92 tonnes held, higher than the 819.3 tonnes noted by the World Gold Council’s first quarter-end figure. Also, the iShares Gold Trust (NYSEMKT: IAU) was shown to have 197.78 tonnes on May 11, versus the 186.3 tonnes held at the end of the first quarter.