Exchange traded fund investors continued to gravitate toward gold over the first quarter as increasing political risks helped fuel demand for the safe-haven asset to hedge against potentially unwanted surprises.
Global holdings of gold-backed ETFs expanded by 109.1 tons in the first quarter, and total asset sunder management within these ETFs was 2,251.8 tons by quarter-end, or a little over $90 billion, according to the World Gold Council.
The rise in physical gold holdings within the ETFs were fueled by increased investment demand. For instance, the SPDR Gold Shares (NYSEArca: GLD), the largest gold-related ETF by assets, gathered $457.6 million in net inflows over the first three months of the year.
However, the increase in holdings was dwarfed by last year’s large inflows as Q1 2017 flows were only just one-third of the 342.1 tons seen in Q1 2016.
“But this is more an indication of the atypical strength of 2016 inflows than of recent weakness,” according to the World Gold Council. “Indeed, inflows of 109.1 tons are in line with quarterly average between Q1 2009 and Q4 2011 (108.7 tons), a period that encompassed the global financial crisis.”
Contributing to the heavy investment demand, European investors made up the bulk of investment in Q1 2017, with inflows into European-listed products were 92.4 tons, compared to just 14.1 tons added to holdings of U.S.-listed ETFs.
The World Gold Council argued that geopolitical tensions contributed to the ongoing flows into gold-backed ETFs. For example, investors focused on the ongoing rise in anti-establishment parties associated with growing populism across Europe, along with the potential outcomes of elections in Netherlands and France, especially in the wake of the unexpected Brexit vote.
Investors may have also turned to the cheaper gold as a potential value play and a portfolio diversifier in a traditional stock and bond position.
“Negative real and nominal yields coupled with a period of relative calm in regional stock markets improved the appeal of gold, particularly as its price strengthened through the quarter. The dips in the eurodenominated price of gold in January and March were also taken as a good opportunity to add it to portfolios,” according to the World Gold Council.
In the U.S., gold also reacted positively to the Federal Reserve’s more dovish monetary policy guidance when it raised rates in March on expectations around future increases in U>S. rates eased slightly.
Traders were also wary of ongoing risks given the global geopolitical and economic backdrop, especially with the crisis in Syria, ongoing uncertainty over Brexit, a slowdown in China, deteriorating relations between the West and Russia, and tensions over North Korea’s nuclear program.
Physical gold has also found support out of the emerging markets, notably China where retail investment was up 30%, breaking above 100 tons for the fourth time on record. Jewellery demand was also steady and marginally higher year-over-year on slightly higher demand out of India.
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