ETF Gold Demand Highest in 7 Years

One of the bigger demands for gold are ETF’s and they are showing phenomenal growth of late.  Gold smashed through the US$1360 resistance mark during June and on through the second resistance of US$1400 to a 6 year high of US$1423.  Whilst it has pulled back to sit at US$1400 at the time of writing it is still up a solid 9% for the year (10% in AUD terms) while fundamental drivers and interest appear to remain strong.

The World Gold Council just released their latest monthly update of ETF activity and June saw the biggest monthly increase of gold ETF’s in 7 years (during the Euro debt crisis).  Global gold backed ETF holdings jumped 127 tonne (US$5.5billion) or 15% in that single month.  You can see below the correlation with the gold price.

The North American markets saw the biggest about face over previous months accounting for over half the total increase at 65 tonne and Europe not far behind at 59 tonne and with the UK, amidst leadership and Brexit woes on top of everything else, at all time high holdings.

As usual Asian investors (prudently) prefer the moto ‘if you don’t hold it you don’t own it’ and continue to favour physical ownership rather than an ETF derivative proxy.  Asia accounts for only 70.5 tonne of the total 2548 tonne in global ETF’s, just 2.7%.  Why people continue to pile into a paper promise for an asset without counterparty risk is baffling and the Asians ‘get’ that.

Looking more broadly and bringing silver into the picture, below are charts of total global holdings in all know depositories, ETF’s and mutual funds for each metal.  Again you can see that surge in June for gold.  Note how it tapers off in July but how silver starts late and continues strongly but yet again with little effect on the price.  The contrast between the direct correlation of holdings and price with gold and the lack of correlation of late with silver is stark.  Silver holdings are at multi year highs yet the price remains near multi year lows.  Needless to say we are staring at a Gold Silver Ratio of near all time highs of 92.4 at the time of writing.  A contrarian’s delight.  We’ve mentioned this numerous times but more completely last time here.  If you missed it, that is a MUST READ.

Stepping back to the World Gold Council report and it is worth zooming out a bit.  Whilst June was very strong, those outflows in February and April mean on an annualised basis 2019 is well behind the 2 previous biggest years of 2009 and 2016 per the chart below.  The chart below clearly illustrates the ferocity with which ETF’s can consume gold when a market turns to gold and we are only half way through 2019.

A longer term look at total holdings and price shows that since 2016 we haven’t seen the price yet catch up fully to the previous 10 year correlation with total holdings.  To do so would put gold closer to US$1700.

WGC remain bullish on the outlook going forward:

“Despite stock markets trading at or near record levels—the strongest first-half performance in 20 years-- fixed income markets still expect two or three US rate cuts in 2019, as economic data worsens. Earlier this year we noted that rates related to monetary policy would drive gold prices in the short-run, and that the US dollar would play a less significant role, and this has been the outcome so far. With rates falling, global negative-yielding debt is at all-time highs – above $13 trillion – and the price of gold has moved in tandem with those amounts over the past few years. These are all drivers that could continue to support gold prices in the second half of the year.”