The same day in March that it was announced that CNBC commentator Larry Kudlow would become President Trump's latest economic advisor, he offered up this trading advice: "I would buy King Dollar and sell gold."
Investors did the exact opposite.
In addition to pulling more than $5 million from the PowerShares DB U.S. Dollar Index Bullish Fund (UUP) and $55 million from the WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) since the start of the year, investors have plowed more than $3.8 billion into gold ETFs. That's more than 2.5 times the new net inflows that gold ETFs amassed over the whole of 2017.
Clearly, gold is back in a big, big way.
Volatility Drives Billions Into GLD, IAU
The vast majority of these flows (91%) went into physically backed ETFs—specifically, the SPDR Gold Trust (GLD) and the iShares Gold Trust (IAU), which drew $1.49 billion and $1.87 billion in new net money, respectively.
For context, that's roughly the same amount of flows that IAU attracted over all of 2017 ($1.96 billion). For GLD, the flows data is even more dramatic: The fund's 2018 year-to-date inflows represent a 62% increase over the total money it brought in last year ($916 million).
These two ETFs haven't exactly been performance superstars; GLD and IAU are both up only 1.4% year-to-date. So what's driving all these super-sized flows?
For starters, investor jitters over a pickup in market volatility. Gold, prized for its ability to provide stability during market stress, is often used as a hedge whenever equity prices start to zigzag again. That's precisely what we've seen the markets do since mid-February, which, incidentally, is around the time flows started to build steam in both GLD and IAU:
Sources: ETF.com, FactSet; data as of April 27, 2018
What's more, this increased market volatility shows no signs of slowing: The VIX, a measure of expectations of future market volatility, has already risen 82% year-to-date, after spending most of 2017 at record lows.
Inflation Fears Fuel Flows
Investors also tend to turn to gold when they're worried about inflation. That's because, over the long haul, gold tends to preserve its purchasing power, even as inflation erodes the value of other currencies.
Recent economic data suggest that inflation in the U.S. may be back on the upswing. Oil prices, now hovering near $68/barrel, are now near four-year highs. Many American businesses report now paying higher prices for raw materials, such as steel and aluminum. (The Trump tariffs likely are to blame for that, at least in part.) And the personal consumption expenditure index, a benchmark of consumer prices that the Fed uses to measure inflation, is steadily creeping higher, toward 2%.
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]