Over the course of 2016, gold ETF holdings have been a major story in the financial news cycle. In contrast to virtually all other asset classes, the continued rise of gold ETF holdings has brought an increasing number of investors to the safety of precious metals.
One important question that investors large and small ought to ask themselves is this: Are higher gold prices dictating the surge in gold ETF holdings (through the SPDR Gold Trust (GLD) and similar funds) or are ETF inflows buoying the gold price?
The Steady Rise of Gold ETF Holdings
There is no denying that the strong upward trend of gold ETF holdings thus far in 2016 represents a shift in the markets. An astounding 73 tonnes of gold bullion have been added to GLD, the largest gold ETF, over the first two months of the year. This accounts for as much as 2% of global gold demand. In total across all exchange-traded funds, gold ETF holdings have accrued nearly 52 million ounces of the yellow metal—a whopping 1,617 metric tonnes! This has translated into an astounding $5.1 billion of inflows into GLD and the iShares Gold trust (IAU) combined in the first few weeks of 2016 alone.
Especially in the case of ETFs, one of the overarching reasons for this piling into gold has been the volatility and uncertainty of stocks and bonds. These “traditional assets” may have rebounded modestly since mid-February, but they remain mired in one of the worst slumps that the financial markets have seen since the financial crisis. In response, gold ETF inflows have been at their highest since 2010.
Reaching a Turning Point
Most indications are pointing toward a reversal of fortunes for the gold market. This turning point can be seen by the overall momentum of ETF inflows. In 2014 and 2015, when gold prices fell by 10% annually, the stockpile of gold ETF holdings plunged. Even rallies for the precious metals were short-lived, and no consistent change in the downward trend could be found.
Fast forward to 2016. The global markets have suffered steep declines, while the fate of monetary policy set by central banks continues to hang in the balance. The unorthodox policies pursued by the Federal Reserve and its counterparts around the world have not only been a cause for investors to worry, but have also made it cost-effective to hold your money in gold rather than cash or cash-equivalents. So long as central planning continues to falter, the best bulwark against deeper losses is gold.
The Chicken or the Egg?
The important point about gold ETFs is that they both follow the gold price as well as influence them. This is not the case with most other ETFs, making the gold market unique. It brings up the interest “chicken or the egg” paradox: The answer is that both sides of the coin are true. As bullion held by gold ETFs rises, this helps push the spot gold price higher, and vice versa. The two are intimately related, whether it is through GLD or another gold-backed fund. Keep this dynamic in mind as you consider whether action in the gold ETF market is a signal to buy more of the metal.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.