How ETFs and Investors Are Driving Gold Demand Over Central Banks

May 12, 2016 by Jon C. Ogg

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.


After three consecutive quarters of declining ETF demand in 2015, ETF and similar products saw more than a tenfold demand increase in the first quarter of 2016 from the first quarter of 2015 — at 363.7 tonnes versus 25.6 tonnes. The cumulative demand erosion from the final three quarters in 2015 was right at -154 tonnes.

Now let’s consider the top 10 global ETFs and funds holding gold by tonnes. Having total demand of 363.7 tonnes in the first quarter is massive — over three-times the 109.4 demand seen by central banks and governmental institutions. If you put this in context of currency, the World Gold Council’s estimate is that central banks spent $4.16 billion buying and the ETFs and funds spent over $13.8 billion buying gold in the first quarter. Total investment demand, including coins and bars, was a total of almost $23.5 billion.

The total holdings of just the top 10 global ETFs and funds holding gold was 1,645.6 tonnes at the end of the first quarter, as follows:

  1. SPDR Gold Shares (US) with 819.3 tonnes
  2. iShares Gold Trust (US) with 186.3 tonnes
  3. ZKB Gold ETF (Swiss) with 137.7 tonnes
  4. ETFS Physical Gold (UK) with 113.9 tonnes
  5. Gold Bullion Securities (UK) with 92.3 tonnes
  6. Source Physical Gold (UK) with 73.7 tonnes
  7. Xetra-Gold (Germany) with 70.7 tonnes
  8. Sprott Physical Gold Trust (US) with 54.8 tonnes
  9. Central Fund of Canada Ltd. (Canada) with 52.7 tonnes
  10. Julius Baer Physical Gold Fund (Switzerland) with 44.2 tonnes

As you will see later the World Gold Council showed that the total measurement of ETFs and funds holding gold was roughly 1,974 tonnes at the end of the first quarter. This makes ETFs a combined larger holder of gold than China’s central bank  and is nearing one-fourth of the U.S. government. The council talked up ETF inflows:

ETFs had their second highest quarter of inflows ever as investors across the globe sought security to combat heightened economic and financial uncertainty.

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.