Huge YTD Flows Into 2 Gold ETFs

April 30, 2018

Worries about a potential trade war between U.S. and China may have further fueled flows into these two funds, as investors sought a safe haven to protect their wealth against higher raw materials costs down the road.

That said, if investors truly are worried about inflation creeping higher, then gold isn't their best option. History shows that gold usually works better as an inflationary hedge against surprise shocks, rather than against steadily rising inflation, as Reuters recently reported. When inflation is slow and steady, TIPS and other inflation-hedged investments tend to be the better call.

Are Flows Signaling Bearish Sentiment?

As we saw during and after the financial crisis, investors historically have turned to gold as a way to protect their wealth during prolonged equity market downturns. So all these flows into bullion-backed ETFs could be suggesting that investors feel uneasy about the days to come (read: "Gold Unmoved By Market Volatility, Ready For Rally").

These fears wouldn't be unfounded. On Friday, it was reported that the U.S. economy grew at 2.3%, which, while higher than analysts' expectation, still represented a slowdown quarter-over-quarter. Meanwhile in Europe, the private sector grew at the slowest pace in a year, as German industrial production dropped in February. Chinese and Japanese manufacturing numbers have slipped in recent months, too.

And of course there are those tariffs again. Should they take effect, higher taxes on raw materials could substantially raise the price of finished goods and put a chill on economic growth worldwide.

Gold Miners Attract Flows, Too

Of the remaining gold ETFs, only the VanEck Vectors Gold Miner ETF (GDX) and the PowerShares DB Gold Fund (DGL) drew anything more than negligible flows in the first quarter. Since the start of the year, GDX has brought in $437 million, while DGL has brought in $60 million.

That's a significant turnabout for GDX, which saw enormous outflows last year, with investors pulling $2.99 billion from the fund over the course of 2017.

In contrast, 2017 proved to be much better for GDX's sister fund, the VanEck Vectors Junior Gold Miners ETF (GDXJ), which tracks small-cap mining firms. Last year, GDXJ brought in $1.15 billion in new net money.

Since the start of 2018, however, GDXJ has actually lost $49 million.

This shift from juniors to majors echoes many of the same trends pushing investors toward bullion. Gold miner investors typically opt for majors as an inflation hedge and juniors as a speculative play.

With market volatility returning and inflation potentially on the rise, however, it appears that investors are shifting their money from riskier gold stocks toward those offering some inflationary protection.

Contact Lara Crigger at [email protected]

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