The World Gold Council released their Gold Supply and Demand report today. We already know the US$ gold price appreciated by 17% in the first quarter of 2016. Now we know that this drive was almost entirely caused by a massive demand for Gold ETFs. Inflows into ETFs of 360 tonnes were the highest since the first quarter of 2009, easily erasing the total outflows of 2015 and 2014 of 183 and 128 tonnes. This inflow more than compensated for the 21% decline in jewellery demand from Q1 2015.

Gold statistics

What caused this reversal in ETF demand?

There were three major factors.

  • The Negative Interest Rate Policies implemented by central banks in Japan and Europe represent a shift to ‘unconventional policies’ which create ‘great uncertainty. It also lowers the opportunity cost of holding Gold as Gold has a zero yield, never negative.
  • China’s devaluation of the yuan fuelled fears over the country’s economic health and the potential impact on global growth.
  • The pace of US interest rate rises is now widely expected to slow. Rising interest rates in the US is one of the reasons for past outflows from Gold ETFs as investors expected higher Dollar yields and switched from Gold to US treasuries etc.

Inflows were apparently from a broad investor base, from institutional to private. Inflows in China have risen exponentially in recent months. Although they still only account for a very small proportion of the 1,974 tonnes held in these products globally, Chinese gold-backed ETFs on aggregate attracted 11.1 tonnes of inflows during the first quarter, more than doubling their holdings.

Gold ETF inflows

The enthusiasm with which investors renewed their appetite for gold ETFs in the first quarter resulted in the gold price surging by 17%. This was the best quarterly performance in almost three decades and gold ranked as one of the best performing assets globally during the quarter. The effect was also felt in the price of gold measured in other currencies, with double digit gains in the euro (+11%), British pound (+20%), Chinese renminbi (+16%), Indian rupee (+17%) and Turkish lira (+13%).

Gold price currencies

Caution or jump on the bandwagon?

During the global financial meltdown in 2008/09, there was a much stronger case for Gold investment than now. There was a realistic fear then that the world’s monetary system can fail. In such a scenario nothing will beat Gold and the price more than doubled to $1,890 in 2011. As stability returned to the World economy, the Gold price declined to $1,000 last year. It has since surged to nearly $1,300. I will caution against too much optimism because the factors driving this surge as mentioned above, are not as strong as during the global financial meltdown. Low interest rates might stay for a long while, but there are no fears of a financial meltdown. We have to watch Europe closely though, so I might be wrong this time.

Gerhard Lampen

Head Sanlam iTrade Online

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