Demand Challenges Linger For Gold ETFs

Gold exchange traded funds were decent performers in the first quarter, as the SPDR Gold Shares GLD and iShares Gold Trust IAU each gained 0.5 percent. 

Those performances were arguably impressive in the face of slack demand. Recent data points from the World Gold Council confirm first-quarter gold demand was tepid.

“Gold demand of 973.5t was the lowest Q1 since 2008,” said the WGC. “The main cause was a fall in investment demand for gold bars and gold-backed ETFs, partly due to rangebound gold prices.”

What Happened

Specific to gold ETFs, products such as GLD and IAU were resilient to tepid demand in the first three months of 2018 as investors embraced gold ETFs amid increased equity market volatility. The U.S. dollar was weak for much of Q1, providing an assist to dollar-denominated commodities like gold.

In Q1, investors allocated nearly $399 million to GLD, the world's largest gold-backed ETF. IAU saw $1.19 billion in Q1 inflows. Investors favored gold funds even as the Federal Reserve boosted borrowing costs in March, a move that is often seen as punitive to gold because the yellow metal does not offer coupon payments or dividends.

Why It's Important

“Jewelry demand was steady at 487.7t, as growth in China and the U.S. compensated for weaker Indian demand. Central banks bought 116.5t of gold (42-percent-plus year-over-year),” according to the WGC. “Technology demand extended its recent upward trend, growing 4 percent year-over-year to 82.1t. The total supply of gold increased by 3 percent to 1,063.5t, primarily due to a modest increase in producer hedging. Mine production was fractionally higher at 770t.”

Q1 marked the fifth straight quarter of inflows to gold ETFs, but in the first three months of the year, major gold buyers such as China, the U.S. and Germany pared demand for bullion.

What's Next

Gold is off to a rough in the second quarter. The dollar is surging to start the current quarter, sending GLD and IAU lower by more than 2 percent. Still, investors remain fond of GLD and IAU. The two largest gold ETFs have added $850 million and $760 million, respectively, in Q2. 

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Disclosure: The author owns shares of IAU.