Gold ETF Holdings Foretell Higher Gold Prices
If you are not watching inflows at the gold-backed exchange-traded funds (ETFs), you could be making a big mistake. They are making a very bullish case for gold prices.
These days, the yellow precious metal isn’t getting much respect in the mainstream. But, quietly, investors seem to be rushing toward the metal.
Go back to 2013. At that time, investors started to sell their gold-backed ETFs. This created a sell-off in gold prices. They ditched gold because they thought that higher interest rates would be bad for gold.
Now, in 2018, about five years later, we are seeing inflows at gold-backed ETFs increase again. It’s a bullish sign for gold prices, to say the least. It says that investors who ditched gold in 2013 could be coming back.
Watch Out for German Gold Demand
Look at some numbers…
In the second quarter of 2017, gold holdings at ETFs globally were around 2,325.6 tonnes. In the second quarter of 2018, these holdings were 2,432.3 tonnes. (Source: “Gold Demand Trends Q2 2018,” World Gold Council, August 2, 2018.)
Simple math: ETFs gold holdings grew about 106.7 tonnes or five percent year-over-year.
Digging a little deeper, when it comes to ETFs, Europe—and, more specifically, Germany—is worth watching closely.
Over the last one year, between the second quarter of 2017 and the second quarter of 2018, European gold ETFs holdings have been increasing—from 974.0 tonnes to 1,052.6 tonnes. This represents an increase of eight percent year-over-year.
In Germany, it seems like there’s a rush to buy gold.
Consider Xtrackers Physical Gold ETC—an ETF based in Germany. Year-over-year, in the second quarter of 2018, this ETF’s gold holdings jumped 138%.
Xetra-Gold ETF, another gold-backed ETF in Germany, reported a five-percent increase in gold holdings.
To give you some more perspective, among the top 10 gold-backed ETFs, these two German ETFs had the fastest increase in gold holdings year-over-year.
Three Questions Gold Investors Must Ask
Dear reader, looking at the ETF holdings, there are three questions that must be asked.
First, could investor sentiment toward gold be changing? Increasing gold-backed ETF holdings certainly says there’s some interest building up toward the precious metal.
Second, if we assume this to be a long-term phenomenon where the inflows in gold-backed ETFs increase, could the gold market handle it? We are seeing gold’s supply side face headwinds. I wrote about this recently in my article “Looming Supply Shock Could Send Gold Prices Surging Very Quickly.”
Third, could ETF investors impact gold prices? In 2013, ETF investors were the ones that panicked and sent gold prices lower. I have been tracking ETF inflows for a while now and wouldn’t be shocked if gold-backed ETFs have a very positive impact on gold prices in the coming quarters.
I am not going to sugarcoat anything here: gold is not so hot these days. From an investor-psychology point of view, it makes sense too. Nasdaq is up over 13% year-to-date, while gold prices are down 6.81% in the same period. Investors tend to buy things that are increasing in value.
However, I am not discouraged by this decline. I think gold is presenting a great opportunity at the current price. Five years from today, we could be saying “Woah, the gold price at $1,220 was so cheap! I should’ve bought more!”