Financial innovation may only generate its true impact when the conditions are right for their use. The first gold ETF was launched in 2003. The growth of gold ETFs has made them the most successful commodity ETFs in the world, yet the size of gold ETF holdings and flow did not it a major factor during the Great Financial Crisis relative to more traditional gold players.
The combination of market conditions and use of the ETF innovation has unleashed demand that has not been seen before. If the meme that gold should be a part of every investor's portfolio is followed, it is unclear how high the price may rise as investors use easy access to introduce gold as a diversifier.
The combination of market conditions and use of the ETF innovation has unleashed demand that has not been seen before. If the meme that gold should be a part of every investor's portfolio is followed, it is unclear how high the price may rise as investors use easy access to introduce gold as a diversifier.
The traditional methods for buying gold: bullion, coins or jewelry, were never very efficient for most investors. Costs and storage are high, and the bid-ask spread could make any regular transaction difficult. The use of gold futures is a marked improvement with substantially lower costs, but a regular investor in the US would have to open a futures account and buy from a futures broker. Most US investors do not have futures and options accounts.
Gold ETFs solved the access problem through the simple innovation of allowing investors to buy a security in their brokerage or retirement accounts. No physical or futures transaction makes the purchase very easy. The increase in equity and fixed income ETF usage since the last financial crisis has only further made conditions right for explosive demand once the market created the environment for buying.
Gold ETFs solved the access problem through the simple innovation of allowing investors to buy a security in their brokerage or retirement accounts. No physical or futures transaction makes the purchase very easy. The increase in equity and fixed income ETF usage since the last financial crisis has only further made conditions right for explosive demand once the market created the environment for buying.
Easy financial access with market conditions of higher uncertainty, a declining, dollar, and negative real interest rates makes for an environment of strong gold demand with a commodity that may not be able to easily generate new supply.
Gold ETFs holdings now represent 3,808 tonnes of gold. Gold holdings have increased 922 tonnes since the beginning of the year, 21% percent.
Global gold ETFs as a group are now the second largest holders of gold next to the Unites States official holdings. US gold ETF holdings alone will be in the top seven official reserve holders. The growth in gold ETF holdings for this year would have easily place it in the top ten holders of official reserves ahead of Japan. It is expected that central banks buying gold will increase this year as reported by the Central Bank Gold Reserve (CBGR) survey, but ETF buying is greater than central bank buying in 2019 at 668 tonnes versus the 922 tonnes purchased so far this year in gold ETFs.
Yearly product for gold is now at 3534 tonnes, so ETF holdings represent more than one year of total production and the increase this year would represent 25% of all production from 2019.
Gold ETF holdings are greater than the open interest of gold futures and purchases this year represent over 40 percent of current open interest. The increase this year is 50% greater than the money manager net long positions in gold. Gold ETF growth this year is still less than half gold jewelry demand for last year, but we are only counting through mid-August.
We are not making a gold prediction, but changes in the market structure for buying gold means that demand can be much larger than what has been seen in previous crises and similarly any correction may be more violent. Low costs make for increased demand from momentum or discretionary trading. Low cost means flows in and out can be more violent and create a strong feedback loop that will impact price.
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