Gold’s rally is getting tired - but ETF demand is just waking up
NEW YORK (March 22) Gold prices are holding their ground above $3,000 an ounce—at least for now—as a growing number of analysts are warning investors that the market is looking a little tired and is due for a pullback and consolidation period.
While sentiment in the marketplace is shifting slightly, nobody is ready to outright sell the precious metal. We all know the factors behind this unprecedented rally, and they are not going to change anytime soon. Central banks will continue to buy gold and diversify away from the U.S. dollar, and global investors will continue to see it as an important safe-haven asset in a world facing significant economic uncertainty and rising inflation pressures.
This week, I wanted to focus more on investor demand for gold-backed investments. As I mentioned last week, this segment of the marketplace has been extremely late to the party, as we are just starting to see solid inflows.
“We expect ETFs to be a major driver of investment demand for the remainder of this year,” George Milling-Stanley told Kitco News in an interview on Friday.
According to analysts, inflation is the biggest reason why investors are finally starting to turn to gold. In the last few years, the risk-free trade has been to buy 3-month money market funds. Falling inflation and robust economic growth have provided investors with real returns. However, President Donald Trump’s trade war is starting to bite, as consumers are seeing higher costs. Real yields are starting to fall, reducing gold’s opportunity cost as a non-yielding asset.
Gold’s opportunity cost is dropping as the escalating trade war weighs on economic growth, and investors are looking for alternative assets to diversify their portfolios.
Although demand for gold-backed ETFs has picked up significantly since last month, there is still plenty of potential.
Data from SPDR Gold Shares (NYSE: GLD), the world’s largest gold-backed ETF, shows its gold holdings so far this year have grown by more than 37 tonnes to 910 tonnes. However, in 2020—the last major gold rally—GLD held 1,278 tonnes of gold.
Gold holdings are down 28% from nearly five years ago, but prices are up nearly $1,300. Gold has rallied nearly 62% in the last 12 months, even as ETF demand has remained lackluster. 2020 doesn’t even represent the peak in investment demand. Record GLD holdings were set in December 2012 at 1,353 tonnes.
The biggest difference between the gold market during the last two rallies and today is that ETF demand peaked as prices topped out. In 2012, investors started to liquidate their gold holdings as the global economy began to improve after the 2008 financial crisis.
In 2020, central banks and governments flooded financial markets with liquidity to support the global economy, which had been devastated by the COVID-19 pandemic. Gold benefited from this liquidity, but a lot of capital flowed into stocks—until now.
KitcoNews
