Treasury bonds aren’t the only safe havens rallying this year. As trade war and global growth concerns have continually flared throughout the year, another safety play is doing just as well: gold. Prices for the yellow metal currently hover near $1,450/oz, a level not seen in six years.
Spot Gold Price
Investors have taken notice. The SPDR Gold Trust (GLD), the $38 billion gold ETF, is up 12.5% so far this year and has taken in $1.7 billion in fresh cash from investors. The No. 2 gold ETF on the market, the iShares Gold Trust (IAU), has taken in $1.3 billion in the same period.
At the same time, the SPDR Gold MiniShares Trust (GLDM) and the GraniteShares Gold Trust (BAR) have gathered a combined $600 million. The two ETFs offer some of the cheapest exposure to gold out there, with annual fees of 0.18% or less.
Zero Yield Looks Good
It is clear why investors have taken a liking to gold this year. Bond yields around the globe are at or near record lows, and could move even lower if central banks continue to cut interest rates. Bloomberg estimates that $14 trillion of debt in the world is yielding less than zero, or nearly 26% of the market.
It’s a bizarre situation, and makes gold look much more appealing by comparison. When investors literally have to pay to lend money, gold’s “zero yield” is downright attractive.
Indeed, that is probably why demand for gold ETFs in Europe, where government bond yields are broadly negative, has been even stronger than in the U.S, where rates are still positive. The World Gold Council estimates that inflows for European gold ETFs totaled $3.9 billion as of the end of June.
Separate data from Bloomberg shows that total holdings of gold in ETFs stood at 75.6 million troy ounces as of Aug. 1, the highest in six years, and only 8.6% below the all-time high set in 2012.
2 Pillars Driving Gold
Strong demand for gold ETFs is one pillar driving overall gold demand to its highest level in three years. It’s also helped offset tepid physical investment demand for gold bars and coins (which fell to its lowest point since 2009 during the first half of 2019), and surging gold supply (which reached the highest level since 2016, according to the World Gold Council).
The other big factor driving gold demand higher this year has been central bank buying. Gold demand from these institutions surged 57% year over year during the first half of 2019, on pace for the strongest year in decades.
The total net purchases of 374.1 metric tons by central banks equaled 17.1% of total global gold demand between January and June.
“Sluggishness, exacerbated by trade and geopolitical tensions, continued to cast a dark cloud over the global economy,” wrote the WGC. “Central banks, like other investors, sought safety in gold as they looked to protect themselves in the face of many looming risks.”
Poland, Russia, China, India and Turkey were among the biggest gold-buying central banks this year.
Looking ahead, the gold rally will depend on the factors that have lifted it to where it is now. ETF demand may largely be driven by investors’ appetite for portfolio hedging against an economic downturn or for safe-haven alternatives to low-yielding bonds.
Meanwhile, central bank buying may be influenced by the relations between the U.S. and other countries. Tensions between the U.S. and China, the U.S. and Russia, etc., may push those countries to diversify their dollar-denominated foreign exchange reserves into gold.