Gold Rises Despite Fall In ETF Demand

The yellow metal has quietly rallied, but U.S. ETF investors haven't been buying much.

sumit
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Senior ETF Analyst
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Reviewed by: Sumit Roy
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Edited by: Sumit Roy

Gold is on the move this week after saber-rattling by the U.S. and North Korea pushed the safe-haven metal back onto investors' radar.

President Trump said on Tuesday that threats by the Hermit Kingdom would be met by "fire and fury," which was followed up a day later by a North Korea threat to bomb the U.S. territory of Guam.

Despite rising geopolitical tensions, no one is ready to throw in the towel on stocks just yet—the S&P 500 closed nearly unchanged on Wednesday, even after North Korea's tough talk—but investors seem to be willing to add a bit of protection to their portfolios in the form of gold.

The yellow metal climbed to $1,285/oz as tensions rose this week, the best level in about two months, driving year-to-date gains to around 11.5%.

 

Spot Gold

 

No Breakout Yet

Though sporting solid gains for 2017, it doesn't yet look like gold is ready to run away to the upside or that investors are ready to fully embrace the metal. Earlier in the year, prices approached $1,300 on two separate occasions, but backed down each time.

Strong words between the U.S. and North Korea won't be enough to fuel a sustainable rally, as geopolitical catalysts tend to be short-lived. On the other hand, the dollar's surprise downtrend this year (the U.S. Dollar Index has fallen 8.5% year-to-date) may be a stronger catalyst to keep the rally going.

If the Dollar Index slides below 92 or 93, which is the bottom of the range from the past two years, perhaps that will be enough to send gold through $1,300.
 

 

 

US Dollar Index

 

ETF Slowdown

Aside from the dollar, there's not much for gold bulls to hang their hats on. An environment of record-low stock prices, record-low stock market volatility, and gradually rising interest rates is typically considered gold-negative.

Indeed, the latest Demand Trends report from the World Gold Council (WGC) published earlier this month showed that gold demand in the first half of the year tumbled 14% from 2016, driven largely by waning investor interest in gold ETFs.

Investors added 167.9 metric tons to their gold ETF holdings in the first half of the year (equal to about $6.7 billion), compared with a record-shattering 579.2 metric tons in the year-ago period.

Most of this year's demand for gold ETFs came from Europe, accounting for 76% of inflows. In the U.S., investors haven't been nearly as excited about gold. The SPDR Gold Trust (GLD) had outflows of around $1.1 billion in the period, while the iShares Gold Trust (IAU) had inflows of $600 million.

Compare that with last year, when GLD and IAU had a combined $15.2 billion worth of inflows during the first half of the year.

Lack Of Enthusiasm

Outside of ETFs, other areas of the gold market haven't been too hot either. WGC data show modest increases in bar and coin investment demand and jewelry demand so far in 2017, but both remain below long-term averages.

Central banks also continue to be net buyers, but on a smaller scale than in recent years.

That pretty much characterizes this year's gold market. There are buyers, but they are lacking enthusiasm. It's as if the surging stock market has sucked all the interest out of the yellow metal. That’s why even in a year in which prices are up double-digits, it feels unusually quiet in the gold market.

At the time of writing, the author held no positions in the securities mentioned. Contact Sumit Roy at [email protected].

 

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.