Gold has been one of the few investments that hasn’t disappointed traders this year. In the first quarter gold demand worldwide soared 21%, according to the World Gold Council. It marked the second largest quarter for gold demand on record and kept gold prices healthy and strong.
While the S&P 500 is almost completely flat year-to-date – up around a tenth of a percent – gold is up nearly 18%. Investors have been trying to explain gold’s meteoric rise, but haven’t been able to find much solid evidence to support their theories.
As a safe haven asset, gold typically does well when the global economy falters or experiences high levels of volatility. While the market has certainly stumbled this year, it hasn’t been uncertain enough to drive gold prices so high so quickly. Inflation is one of the main driving forces behind gold values – something that investors haven’t seen for quite a while. The lack of inflation and high relative value of the U.S. dollar makes gold’s current price a mystery.
The Surprising Trend That's Defining Gold's Real Worth
Gold is experiencing a bump from defensive investors with other sectors like consumer staples seeing the most gains so far this year. And gold demand is seeing record high numbers. But the gold demand doesn’t seem to match with other data considering that consumer demand in India fell 39% year-over-year and Chinese demand plummeted 12%.
That leaves ETF’s as the only explanation for gold’s success. The World Gold Council projects that inflows into gold ETF’s are stemming from multiple sources including institutional investors as well as private investors.
It’s a trend that’s been building up for a while now. Investors are leaving mutual funds and flocking to ETF’s in droves. As of December of last year, $150 billion in mutual fund outflows was reported with $150.6 billion in inflows to ETF’s. The lack of strong mutual fund performances and high fees relative to the costs associated with ETF’s has fueled the trend.
The number one gold ETF as far as inflows in concerned is the SPDR Gold Trust (GLD) with $7.7 billion. In light of the lethargic economic data coming in this year, investors are seeking higher returns wherever they can be found – and gold is number one on that list. It’s getting a bump not only from all the money pouring into gold related ETF’s, but it’s also a safe haven in an uncertain market that teeters on the edge of bearish reversal.
As mutual funds continue to lose investors who prefer taking a more active role in their portfolio’s, ETF’s are likely to see large inflows prop up their underlying assets for the foreseeable future. ETF’s are also building up their gold holdings in tonnes. SPDR Gold Trust (GLD) holds 841.92 tonnes as of May 12th – higher than its first quarter end figure of 819.3 tonnes. This suggests the investors are anticipating further growth from the precious metal as the year goes on.