ETF Gold Holdings Continue Rising Streak, Go Positive for 2023

Exchange-traded funds (ETFs) backed by gold witnessed a continued influx of investment for the third month running in May, pushing their overall demand into positive territory for the year. Investors are looking at assets that will protect their portfolios from a weakening dollar and rising inflation.

Gold-backed ETFs Record Increase in Holdings

Globally, ETFs registered an additional 19 tons of gold to their holdings in May. At the end of the month, gold-back funds held a total of 3,478 tons of precious metal. This signifies a year-on-year increase of 6 tons and is the highest figure since October 2022.

However, the total holdings of ETF gold remain 11% below their peak of 3,919 tons recorded in October 2020. Despite a dip in gold prices towards the end of May, total assets under management (AUM) declined marginally by 0.4% to $220 billion.

The World Gold Council posits that the flow into ETFs has been primarily dictated by price movements.

Price Movements Drive ETF Gold Flows

Positive price momentum at the beginning of May sparked investor interest in gold ETFs. However, some of these gains were offset as gold prices retreated toward the end of the month. Notably, ongoing US debt ceiling negotiations and brewing concerns within the banking industry have led investors to seek refuge in safe-haven assets, bolstering the positive trend in May.

Even though physical gold investment demand nearly hit record levels in Q1 2023, inflows into ETFs remained subdued during the early part of the year.

Regional Breakdown of Gold ETF Flows

North American gold ETFs witnessed net inflows for the third month, adding another 21.2 tons of gold. This resulted in year-to-date inflows totaling 47 tons. As of May's end, North American funds boasted a gold reserve of 1,773.7 tons, a peak not witnessed since September 2022.

In contrast, European-based funds reported net outflows of 2 tons, largely influenced by persistent inflation within the eurozone. Anticipations of the European Central Bank increasing interest rates have created obstacles for gold, leading to an outflow of 42.9 tons from European funds this year.

Asian funds registered modest net inflows of 0.1 tons, with outflows from Chinese funds balanced by inflows from Japan and India. The net flow of gold into Asian funds remained largely stagnant during the year, showing a slight decline of 0.5 tons.

Meanwhile, ETFs in other regions, including Turkey, Australia, and South Africa, also posted a small net inflow of 0.4 tons. Notably, significant inflows into Turkish funds, driven by local political and economic uncertainties, tipped the year-to-date flows into positive territory at 2.7 tons.

ETF Gold Inflows and Their Impact on Gold Market

The inflows of gold into ETFs significantly affect the global gold market by pushing the overall demand higher. ETFs, which are backed by the issuer's physical gold holdings, are traded like stocks on the market. This setup allows investors to invest in gold without purchasing full ounces of gold at the spot price.

In the context of gold-backed ETFs, it's essential to note that the actual ownership of the gold remains with the issuer. Buying the most common ETFs does not provide investors with any tangible amount of the precious metal. Despite their many advantages, ETFs are not a substitute for owning physical metal, which is why Bullion Exchanges recommends buying gold bullion first in an overall investment strategy.

What potential impacts could continue inflows into gold-backed ETFs have on the global gold market, and how might these trends influence the price of gold in the coming months?