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%.