Amid weakness in bar and coin buying, global gold demand declined in 2017, but exchange traded funds, such as the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and other gold-backed exchange traded products, attracted fresh interest from investors.
Gold has enjoyed greater demand in a low interest-rate environment as the hard asset becomes more attractive to investors compared to yield-bearing assets. However, traders lose interest in gold when rates rise since the bullion does not produce a yield. Interest rates remain low in many developed markets and some emerging markets have been rapidly lowering borrowing costs this year.
Inflation could serve as a catalyst for the yellow metal and for gold-related ETFs. By some metrics, the Fed has under-estimated U.S. inflation, which could prove beneficial to gold because the yellow metal is historically a popular inflation fighter.
“Inflows into exchange-traded funds (ETFs) continued steadily throughout the year, totalling 202.8t, but lagged behind the exceptional levels seen in 2016. Similarly, although central banks continued to add to reserves, purchasing 371t in 2017, buying was down 5% year-on-year,” according to the World Gold Council (WGC).
Gold is also now competing with digital currencies, such as bitcoin, but the WGC reminds investors that gold is very different from cryptocurrencies since the physical precious metal is less volatile, has a more liquid market, trades in an established regulatory framework, has a well understood role in an investment portfolio and has little overlap with cryptocurrencies on many sources of demand and supply. The yellow metal is also an important portfolio diversifier when traditional assets slump.