This Year's Gold ETF Frenzy Is Not The First

13.3 million troy ounces—that's how much of the yellow metal that physically backed gold ETFs have bought so far this year.

In dollars, that amounts to roughly $15 billion, with the bulk of it going into two U.S-listed giants―the SPDR Gold Trust (GLD | A-100), which took in $9.6 billion, and the iShares Gold Trust (IAU | B-100), which took in $1.7 billion, according to FactSet data.

While these are large figures by any measure, this isn't the first time investors have gone gaga for gold ETFs. Since the launch of GLD in late 2004, investors have either hated or loved gold ETFs, but mostly the latter.

Below is the year-by-year change in gold ETF holdings:

Source: Bloomberg

For eight-straight years between 2005 and 2012, exchange-traded fund holdings increased by an annual average of 9.9 million troy ounces and a total of 79.3 million troy ounces.

This year's 13.3 million increase is the second-largest buying spree by investors, behind only 2009's 21 million ounces (of course, there's still time to catch up, with another six months of the year to go).

In contrast, 2013-2015 was a period in which gold ETFs fell out of favor for investors, with nearly 38 million troy ounces coming out of gold funds in those years.

A Large Portion Of Global Demand

It's no coincidence that as investors bought significant quantities of gold from 2005 through 2012, prices for the yellow metal trended up―and as they sold large amounts in 2013 through 2015, prices trended down.

Gold Price (Blue) & Gold ETF Holdings (Orange)

On a good year, ETF demand makes up a substantial portion of total global gold demand. In 2009, for example, ETFs and similar products accounted for 17.7% of worldwide demand, according to the World Gold Council.

In the first quarter of this year, they made up an even bigger portion—28.2%—of global demand.

On the other hand, in a bad year, selling of gold ETFs can reduce demand significantly, as it did in 2013. In that year, demand dropped 29 million troy ounces—by a fifth—due to gold exchange-traded fund outflows.
 

Gold ETFs Enter Fourth Phase

There are certainly many factors that go into shaping gold prices, but it's clear that investor demand for gold-backed ETFs has become one of the key components since these products first hit the market more than a decade ago.

Thus far, there have been four phases for gold ETFs. The first was between 2005 and 2007, when gold ETFs were novel, and investors began to use them as trading vehicles and portfolio diversifiers.

The second was in 2008 through 2012, when the Federal Reserve and other central banks responded to the financial crisis and the Great Recession by unleashing unprecedented monetary stimulus into the economy, fueling fears of runaway inflation.

The third phase, in 2013 through 2015, was when investors' fascination with gold finally waned on the back of surging stock markets, a rapid appreciation in the U.S. dollar, and a growing realization that the high rates of inflation that many feared was not about to materialize.

Now in 2016, a fourth phase for gold ETFs has begun. Investor demand is roaring back to life amid growing concerns that low interest rates—even negative interest rates—may be here to stay; and amid concerns that stocks could get walloped again after two major corrections in the span of five months.

Could 2016 be just the start of another multiyear period of aggressive gold buying by ETF investors? If so, the gold rally may just be getting started.

Contact Sumit Roy at [email protected].