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Are ETFs Driving Up Gold Prices?

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After three years of losses, 2016 has turned out to be a great year for gold. The metal was on a tear on safe haven demand and dovish central banks across developed economies to ward off growth issues. A rush to safety for the most part of 1H16 were triggered by the Chinese market upheaval, never-ending volatility  in oil prices and a shocking event like Brexit at the end of the second quarter (read: Top ETF Stories of the First Half of 2016).

Presently, the metal is hovering around $1,363.30 per ounce and there are also some analysts who expect gold to hit $1,425 an ounce by the end of Q3. However, views that gold will return to $1,200–$1,250 by the end of the year are also prevalent.

Global growth issues, a flurry of negative interest rates in the developed economies like Euro zone and Japan and a still-dovish Fed, due to worries over repercussions of the global market weakness and slight momentum loss in the U.S. economy, have made this metal a true winner this year (read: Gold ETFs to Continue Their Bull Run: Here's Why?).

Notably, the Fed opted for liftoff in December 2015 after almost a decade and since then kept its key rates unchanged. As the Fed hasn’t tightened the policy this year, the greenback remains muted. Now since metals like gold are linked to the U.S. dollar, their prices remain steep.

On the other hand, countries like Sweden, Switzerland and Denmark practice a negative rates policy to maintain their export competitiveness compared with other Euro zone economies.

But Who Exactly are the Buyers of Gold?

Investors should note that physical demand for gold touched a seven-year low in the second quarter. But ETFs invested in gold had a lot to make up for that loss as per metals consultant GFMS, going by a recent article published in Wall Street journal.

Strong Demand for Gold ETFs

World Gold Council (WGC) data also validates the fact. As per WGC, gold demand peaked at 1,290 tons in Q1 of 2016, representing a 21% year-on-year rise. This was the ‘second-largest quarter on record’. This height was attained by huge inflows into ETFs. Central banks remained decent purchasers of gold.

According to the June quarterly report by GFMS Thomson Reuters, global ETF demand was 568 tons, which outpaced the total investment and jewelry demand worth 505 tons from the two largest consumers – India and China. The safe-haven demand actually boosted gold ETFs this year (read: 1H ETF Asset Report: Gold Glows; Equities Fade).

Jewelry Demand Low

One of the largest buyers for gold – India – saw a 41% year-over-year decline in demand for jewelry while another top buyer – China – witnessed a 17% fall. Both dragged down global demand for jewelry by 19%. Higher prices weighed on jewelry demand especially in the “price-sensitive markets of Asia and the Middle East”, according to WGC.

The June quarter was one of the worst for Indian gold demand and imports. Increased prices, strike and an excise duty on gold jewelry weighed on gold demand. Jewelry buying plunged 56% year over year in India in Q2, as per GFMS data.

China’s jewelry industry also underwent “its worst second quarter performance since 2009, with demand contracting 31%” year over year. There was also a significant decline in bar and coin buying in China.

Gold ETFs in Focus

Investors may thus keep a watch on gold ETFs. Gold bullion ETFSPDR Gold Shares GLD added the highest assets worth about $12.2 billion in 1H (read: Should You Buy Gold and Bond ETFs after Brexit?).

Other ETFs worth considering are iShares Gold Trust ETF IAU, ETRACS CMCI Gold Total Return ETN , Van Eck Merk Gold Trust ETF OUNZ, ETFS Physical Swiss Gold Shares ETF SGOL and PowerShares DB Gold Fund DGL.

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