Gold ETFs Flip Back to Inflows as Gold Price Recovers Amid Soaring Inflation

The gold price has started to recover amid soaring inflation expectations, and it's starting to show in flows to exchange-traded funds. According to the World Gold Council, gold-backed ETFs added 61.3 tons of gold last month, amounting to $3.4 billion or 1.7% of assets under management.

May brought a reversal of three consecutive months of net outflows from gold ETFs. The council believes the increased demand for gold ETFs is primarily due to higher investment demand, the higher gold price and renewed inflation concerns. Other likely factors were the weaker dollar and lower real yields.

Gold ETFs see a reversal of flows

Global assets under management by gold ETFs stood at $3,628 tons worth $222 billion. The World Gold Council said assets under management is now just 9% short of the August 2020 high of $240 billion and 7% below the October tonnage high of 3,908 tons.

The council found that larger U.S., U.K. and German ETFs were again the primary flows driver as they flipped to net inflows. North American funds added 34.5 tons, while European funds added 31.2 tons. Funds in other parts of the world saw outflows amounting to 1.9% of assets or 1 ton worth $69 million.

ETFs in Asia recorded a second consecutive month of outflows amounting to $210 million or 2.7% of their assets. Almost all of those outflows came from Chinese ETFs, and the council noted that China's local stock market was strong last month. Despite the outflows, Asia remains the strongest region by percentage growth this year after adding 11% to its assets or 13.8 tons through the end of May.

Gold price jumps

According to the World Gold Council, the price of gold was up 7.5% for the month of May at $1,900 per ounce as it smashed through key resistance levels. After struggling during the first three months of the year, the yellow metal is now roughly flat year to date, following a 13% rally in April and May.

Gold's daily trading averages climbed to $176 billion after declining for two consecutive months. That's a little higher than the year-to-date average of $165 billion but less than the 2020 average of $183 billion. Citing the recent Commitment of Traders report for gold COMEX futures, the World Gold Council said net long positioning shifted higher to 725 tons or $44 billion, marking the highest level since February.

However, it remains below the 2020 average net long of 871 tons or $53 billion. The average weekly net long positioning has historically been around 500 tons or $31 billion.

Factors impacting the gold price

The World Gold Council found that all but two of the variables it uses for its short-term price-performance model positively impacted gold's performance in May, the first time that's happened since June 2011.

The organization believes gold's recent strength is due to a combination of higher inflation expectations, a weaker U.S. dollar, and positive gold sentiment and price momentum. In addition, the council sees anecdotal supporting factors as gold prices catching up to other commodities' reflation strength, strong holiday demand in China and increased central bank demand.

The consensus view for inflation is that it will be transitory, but it should be noted that once prices are raised, they rarely go back down. In an email on Thursday, Edward Moya said that gold jumped after the extremely hot Consumer Price Index reading pushed Treasury yields higher. However, it didn't last.

"Once investors digested the inflation report, they quickly concluded inflation will still likely be transitory and that it doesn't change the longer-term narrative for Fed policy. The risks of persistent [inflation] continue to dwindle despite hotter-than-expected inflation readings. Price hikes are sticky, so financial markets need to be careful and not expect consumer giants to roll them back. For now, gold will probably see more inflows from the stimulus trade and broad rally with risky assets and less from inflation hedges."

Why the gold price could keep climbing

Moya predicts that gold will consolidate around the $1,900 level leading up to next week's Federal Open Market Committee meeting. However, many gold bulls expect the price to keep rising. Briton Hill of Weber Global Management told Kitco News that the big risk for investors this decade is not a stock market correction but rather "invisible wealth destruction" due to high, persistent inflation. 

He noted that the inflationary pressures we are already seeing are much stronger than what most investors have priced in. For example, food prices are up more than 10%, while gas has nearly doubled. In addition, healthcare costs continue to rise by 10% to 15% per year, and Hill wouldn't be surprised if inflation is already at 10%. 

He advises investors to start hedging against inflation if they haven't already done so, and he likes commodities for that purpose, especially gold, silver and oil. Hill expects the gold price to skyrocket to $20,000 this decade due to technical trends for the precious metal and the inflationary macro environment.

He warned that inflation along the lines of what we witnessed in the 1970s could be in order over the long term, noting that "you can't produce trillions of dollars with 0% interest rates and not introduce inflation." During the 1970s, which brought runaway inflation, the precious metal sector jumped by thousands of percentage points.

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