2017’s Surprise Source Of Gold ETF Demand

The stock market is roaring to record highs on a near-daily basis, volatility is at record lows and bitcoin is being hailed as the safe haven of the future. In this environment, it's hard to imagine any investors would be buying gold.

Yet countless investors from all around the world are doing just that, suggesting yellow metal hasn't lost its luster despite existing in a financial market environment that is widely considered negative for gold.

US Demand Down But Solid

A new report from the World Gold Council published earlier this month showed that investors bought $2.2 billion worth of gold ETFs in September. Nearly all of those investors were from North America, and the U.S. in particular.

The usual suspects, the SPDR Gold Trust (GLD) and the iShares Gold Trust (IAU), took in the most money during the month―a combined $2.5 billion.

Year-to-date, inflows into U.S.-listed gold ETFs have been solid, with about $3.4 billion entering the space.

Though that pales compared with last year, when GLD and IAU had a combined $15 billion worth of inflows through the first nine months of the year, it's a solid haul in the current market environment.

"Across Western markets investors were attracted by gold’s properties as an insurance asset," wrote the World Gold Council in its latest Demand Trends report. "The environment created by sporadic global terrorist incidents, tension between the U.S. and North Korea, and the shock sacking of FBI Director Comey, left investors keenly aware of the risk of unexpected, destabilizing events, and this underpinned an element of gold-backed ETF inflows."

European Gold ETF Assets At Record

Perhaps the most surprising data point from the WGC is that most of the money heading into gold ETFs is taking place outside the U.S.

In fact, $4.6 billion has flowed into European gold ETFs this year, such as the German-listed Xetra-Gold ETF, whose $2.1 billion worth of inflows in 2017 leads all ETFs. 

The Source Physical Gold P-ETC and the iShares Physical Gold ETC, both listed in the U.K., have also attracted interest, with inflows of $1.3 billion and $490 million this year, respectively.

Assets under management in European gold ETFs is close to an all-time high—$39.9 billion. That's second only to U.S. gold ETFs, which have $52.7 billion in AUM.

In its Demand Trends report, the World Gold Council noted that geopolitical factors, such as elections in France, Germany, the U.K. and elsewhere, drove European investors into gold ETFs this year.

Additionally, "negative bond yields in Germany – home to the largest European-based fund, Xetra-Gold – continued to drive investment into domestic funds ... ," the WGC wrote.

YTD Flows By Region

Sources: World Gold Council, Bloomberg

'Speculative' Behavior In China

Outside of the Western ETF markets, demand for gold ETF hasn't been as strong. Asian gold ETFs saw net outflows of $485 million so far this year, led by China.

"Chinese gold-backed ETF holdings have shrunk this year, having risen more than six-fold during 2016," according to the WGC.  "This volatility in part reflects the speculative investment behavior that is more prominent in China than in many other markets."

"Our consumer research confirms this ‘speculative’ bias, which is more closely linked to gold-backed ETFs than gold bars and coins,” the WGC added. “According to our research, 54% of Chinese investors described the role of their investment in gold-backed ETFs as being either speculative or for short term returns, compared with just 25% of investors in gold bars and coins."

Contact Sumit Roy at [email protected]