If there were ever any doubt about how important gold ETFs have become to the overall gold market, the events of 2016 emphatically put an end to that. During the first half of the year, more than $14 billion flowed into the two largest gold ETFs, the SPDR Gold Trust (GLD) and the iShares Gold Trust (IAU), fueling a 20% increase in gold prices.

The ETF flows were unprecedented, and combined with purchases of gold bars and coins, investment became the largest component of gold demand for the first time. Suddenly, it was investors that were dictating gold prices, overshadowing the usually influential consumer demand for jewelry and purchases by central banks.

There are many reasons gold found favor among investors. Stock market volatility, extreme currency movements, and concerns about the economies of China and Europe were a few.

But most notable was the new paradigm of negative interest rates.

$13 Trillion In Negative Yields
Never before have interest rates around the world been lower than they were in 2016, and never before have negative interest rates been so pervasive. At one point this year, more than $13 trillion worth of bonds were trading with negative yields.

Most of those bonds traded in Europe and Japan, but even in the U.S., yields for 10- and 30-year Treasurys hit record lows in July, pushed down by the unexpected “Brexit” vote in the U.K.

Though yields have since climbed from their lows, they remain at levels once thought unimaginable. Demographics, easy monetary policies and shaky economic growth may keep bond yields capped, even as the Fed gets set to potentially hike its benchmark overnight rate by 0.25% in December.

A continuation of the low-interest-rate paradigm means money should continue to flow into gold ETFs as investors look for alternative safe havens to government bonds (low rates reduce the opportunity cost of holding zero-yielding gold).

Though gold ETFs are unlikely to see inflows anywhere close to what they saw during the first half of 2016, investor demand is likely to remain strong. Another $5 billion to $10 billion of inflows in 2017 wouldn’t be surprising. That, along with a rebound in depressed jewelry demand, may be enough to push gold prices back above the $1,300 mark and beyond in the coming year.

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