Gold Record In Sight As ETF Inflows Skyrocket

It took nine years and another crisis to push gold prices back above $1,800/oz again. The yellow metal topped that level last week, fueling year-to-date gains of nearly 19%. That’s a healthy return in a year in which the S&P 500 has fallen by about 1.4%.

Gold’s latest ascent comes as a big wave of coronavirus cases sweeps the Americas. Even as stocks remain well off their lows thanks to central bank support, investors have been using gold as a hedge in case financial markets turn sour again.

Indeed, that central bank support itself has raised concerns about inflation pressures down the line, adding another reason for investors to hold gold.
 

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Deja Vu

For investors who were around a decade ago, it’s deja vu. In the years and months leading up to September 2011, gold prices galloped higher, hitting record after record as investors fretted that then-unprecedented stimulus measures—such as quantitative easing—would lead to inflation.

At the time, the global financial crisis and the subsequent eurozone debt crisis darkened the outlook for financial markets, bolstering the case for gold.

Prices peaked at more than $1,900 ($1,921 on an intraday basis) in early September of that year, one month after Standard & Poor’s famously downgraded its credit rating on U.S. federal government debt from AAA to AA+.

For the next four years, gold drifted lower as the outlook for financial markets brightened, and it became increasingly clear that runaway inflation wasn’t going to be an issue. Prices for the metal bottomed out at $1,051 in December 2015.

Long Road Back

After reaching a trough in 2015, gold struggled over the next few years. The breakout moment came during the middle of 2019, after the Federal Reserve made the last of its rate hikes and shifted gears to a more neutral policy stance.

That helped push gold prices through $1,500, and then this year, they got another shot in the arm from the coronavirus pandemic and all of the monetary policy measures that followed suit. 

Concerns about inflation, deflation, wobbly economies and financial markets are all reasons that investors have piled into gold this year. The metal has essentially become an all-purpose hedge for investors who believe in its safe haven properties.

Through the first six months of the year, those investors added $39.5 billion to gold ETFs, according to the World Gold Council. That far exceeds the $23 billion that entered gold ETFs during 2016, the previous annual record haul.

About 62% of that money has headed for U.S.-listed gold ETFs, like the SPDR Gold Trust (GLD) and the iShares Gold Trust (IAU), which together gathered more than $20 billion year-to-date. But a lot of the money has also headed for gold ETFs in Europe, and to a lesser extent, Asia.

According to the WGC, the gold ETF inflows are equal to 45% of global gold production during the first half of the year.

Gold ETF Inflows By Year

Source: World Gold Council

All-Time High In Reach

Investor enthusiasm for gold couldn’t have come at a better time for the metal. As the coronavirus ripped through Asia this year, demand in traditionally strong gold markets, like China and India, sagged. But the plunge in Asian gold jewelry demand has been more than made up for by the surge in ETF demand in Western markets.

The strong momentum in gold prices, along with persistent economic jitters, could keep that money flowing, setting the yellow metal up to potentially challenge its all-time high from 2011. It’s only about 5.5% up from these levels to get there and 11% up to get to $2,000, which would be a nice round milestone for bulls.

It remains to be seen, however, if the gold rally still has legs after the coronavirus pandemic is truly contained—perhaps as early as late this year or early next year if the optimists are right.

Essentially, the question is: will the money keep flowing into gold ETFs, which now account for nearly half of all gold demand?

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2