The SPDR Gold Shares (NYSEArca: GLD) and the SPDR Gold MiniShares (NYSEArca: GLDM), along with other bullion-backed ETFs, remain the stars of the commodities complex this year even as gold dynamics experience seismic shifts.
One of those shifts is the ability of gold ETFs to shoot higher even as jewelry demand wanes, as it did in the first quarter.
“But gold demand history illustrates an unusual compensatory mechanism, in that during periods when jewelry demand drops dramatically there is often a significant pickup in demand for investment, as investors seek the benefits of gold’s status as a safe-haven asset,” according to State Street. “And so it proved during the opening three months of 2020 when the demand for gold as an investment soared a full 80%.”
Gold Medals All Around
We are currently seeing greater demand for gold exposure through ETFs as an easy way to hedge against ongoing risks and as a way to protect purchasing power in light of aggressive monetary easing policies like near-zero interest rates and infinite bond purchasing.
With interest rates low and central banks gobbling up gold, the yellow metal, GLD and GLDM can deliver more near-term upside even as the global economy rebounds from COVID-19.
“With the world reopening in only very slow increments, we expect jewelry demand to be hit even harder in Q2,” according to State Street. “One ray of hope is that the adoption of online merchandising by jewelers in China clearly appealed to the tech-savvy younger generation in Q1, with one leading retailer reporting that their digital store attracted a substantial number of new customers within two days of its launch in late February.”
Investment demand, including ETFs, continues supporting gold prices. In fact, GLD is one of the top asset-gathering ETFs this year.
“As for investment demand, net inflows into US gold-backed ETFs year-to-date have already reached $14 billion, higher than all of 2019,” notes State Street. “Inflows in April totaled $9.3 billion, suggesting that Q2 could see investment demand potentially growing even more than it did in Q1. There is no question that the demand landscape may see even more dramatic changes. The gold price is up over 14% year to date and up over 33% on a rolling 12-month basis. Any surprise to the upside in jewelry demand versus expectation, coupled with continuing strong investment, could be supportive for the gold price.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.