Commodities & Metals

How ETFs and Investors Are Driving Gold Demand Over Central Banks

24/7 Wall St. is not surprised by the notion that ETFs are out-demanding central banks. The fury of gold demand in the first quarter was something not seen in years, and central banks are more concerned about devaluing their currency for trade purposes. Still, the 100% or so gain in many of the gold miners is just now finally starting to be met by analyst downgrades or less optimism.

The World Gold Council projects that central banks are likely to remain buyers of gold. It said that one driving force is that close to one-third of global government debt has a negative yield. Despite some dips in demand trends, the World Gold Council talked up the importance of central banks:

There is little doubt that central banks’ enthusiasm for gold remains resolute. Having been particularly evident in the second half of 2015, when purchases amounted to the largest semi-annual total on record, 2016 has begun in similar fashion. In Q1, central banks purchased – on a net basis – 109.4t, slightly lower (-3%) than the 112.3t in the first quarter of 2015. This is now the 21st consecutive quarter of net purchases, dating back to 2011.

The World Gold Council also showed three factors that arise from negative interest rate policies that should support central bank investment in gold:

  • Negative rates significantly reduce the pool of assets in which central banks are likely to invest, as many will be hesitant to commit to a loss-making investment strategy. Indeed, about 30% of advanced country sovereign debt currently trades with a negative yield.
  • Negative rates were partially designed to counter currency appreciation pressures, but thus far the impacted currencies have actually strengthened, prompting concerns of potential intervention measures.
  • Growing uncertainty about the effectiveness of negative rates has contributed to increased turbulence in financial markets.

The SPDR Gold Shares (NYSEMKT: GLD) had 819.3 tonnes at the end of the first quarter of 2016. On May 12, its price was $121.95, with a 52-week trading range of $100.23 to $123.96. It had a total asset base listed as $34.558 billion as of May 11.

The iShares Gold Trust (NYSEMKT: IAU) had 186.3 tonnes at the end of the first quarter. Its price on May 12 was $12.32, versus a 52-week range of $10.12 to $12.52. Its assets as of May 11 were listed as some $8.118 billion.

Additional ETF discussion from The World Council has been included below:

Having seen regular – and at times substantial – outflows over the last three years, ETFs had a stand-out quarter as gold’s investment qualities came back into sharp focus. Inflows reached a seven-year high, close to levels last seen during the Great Recession when the sovereign debt crisis was also in full swing. Gold found favor for its role as an effective risk diversifier, enhanced by its added benefits of liquidity and relatively low volatility.

Inflows were reportedly from a broad investor base, from institutional to private. Notably, there is anecdotal evidence that many of these inflows are from investors initiating or rebuilding strategic, long-term holdings after the wash-out of positions since early 2013. While a portion of the inflows were driven by price momentum and likely to be more tactical in nature, latent demand among investors who have been looking for an opportunity to re-enter the market was a key factor.

Although largely a Western phenomenon, the appeal of gold ETFs was not limited to these regions. Inflows into gold-backed ETFs in China have risen exponentially in recent months. Although they still only account for a very small proportion of the 1,974 tonnes held in these products globally, Chinese gold-backed ETFs on aggregate attracted 11.1t of inflows during the first quarter, more than doubling their holdings in the process. Huaan Yifu Gold ETF surpassed all other funds in Asia: total holdings at quarter-end were 13.5t, up 10.3t from the end of 2015. Although institutional investors were reportedly the driving force behind this flood of inflows, retail investors were also a considerable contributor, looking to gold for diversification and wealth protection.

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