Exchange-traded funds backed by gold increased their holdings by $1 billion in October, marking a possibly bullish shift in investor sentiment toward the precious metal.
The ETFs hold physical gold assets, which are equivalent to the fund’s asset value. Investors in the funds don’t own gold directly and thus save on storage costs. The ETFs are constantly buying and selling gold as investors purchase and redeem fund shares.
During the month, the global ETFs and similar products added 16.5 metric tons, bringing their holdings up to 2,346 metric tons. That’s the first monthly gain in four months, according to data from the World Gold Council, or WGC.
“These numbers are very encouraging,” says George Milling-Stanley, head of gold strategy at State Street Global Advisors, who worked on the 2004 launch of the largest gold-backed ETF, the SPDR Gold Shares (GLD). The numbers “confirm our view that investors are once again turning to gold as a defensive asset, offering some protection against the unexpected, whether these tail risks are macroeconomic or geopolitical in nature.”
Other reasons for holding gold include portfolio diversification, liquidity, relatively low volatility, and improved risk-adjusted returns, he says.
The strong monthly gain in gold ETF holdings follows a net reduction of 103.2 metric tons in the third quarter, according to the WGC. Those were the first quarterly outflows since the first quarter of 2016.
“Flows into gold-backed ETFs are often indicative of investor sentiment in the market, as well as reactionary moves to the price of gold,” says Juan Carlos Artigas, director of investment research at the WGC.
But the market has also “seen inflows into low-cost gold-backed ETFs over the past few months, which suggest there are long-term investors buying gold as a strategic asset,” says Artigas. These funds have lower share prices and expenses than others. Among them is the SPDR Gold MiniShares Trust (GLDM), part of State Street Global Advisors’ SPDR suite of gold-backed ETFs. The fund has raised more than $300 million in just a few months, says Milling-Stanley.
Investors, however, shouldn’t get too carried away with the seeming shift in sentiment. “Inflows into ETFs don’t necessarily suggest a rise in gold prices is ahead. It’s more likely that the rally is current,” says Anthony Poole, editor in chief of Platts Metals Daily at S&P Global Platts. “When ETFs hoard gold, it usually results in prices rising.”
The changes in gold holdings matched moves in gold futures prices. In the third quarter, ETF holdings fell as prices suffered from a 4.8% decline, and as prices rose roughly 1.8% in October, ETF holdings climbed. The positive is “that the gold market will remain supported, regardless of the physical demand from the jewelry sector in China and India heading into year-end,” says Nick Jonson, senior markets editor at S&P Global Platts.
The SPDR Gold Trust has fallen by more than 7% so far this year as of Friday. It rose over 2% in October—the first monthly climb since March.
Other sources of demand have also been positive. Global central banks significantly raised purchases of gold for their reserves in the third quarter. Global reserves climbed by 22% to 148.4 metric tons in the third quarter, from the same time a year earlier, according to the WGC. That was the highest level of quarterly demand since the fourth quarter of 2015. Central bank buying has “helped support the market as many emerging market and developing world economies seek to diversify their foreign reserves,” Jonson says.
For now, moves in the U.S. dollar and real interest rates will continue to have the biggest influence on gold prices, he says. Higher interest rates can boost the dollar and dull demand for dollar-denominated commodities. That’s contributed to a nearly 8% decline in gold prices year to date. Futures prices settled at $1,225.10 an ounce on Thursday.
Gold is likely to “rise modestly” to an average $1,250 in the fourth quarter of this year,” says Cailin Birch, senior commodities analyst at the Economist Intelligence Unit, “as concerns about a possible U.S. economic slowdown and escalating U.S.-China trade war dampen some market enthusiasm.”
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