ETFs are fairly new to gold. The first ETF backed by physical gold was launched in Australia in 2003. However, it wasn't until November 2004 when State Street Global Advisors and the World Gold Council launched SPDR Gold Shares (GLD) that gold-backed ETFs really took off. Although GLD is by far the largest, a number of gold-backed ETFs give investors direct exposure. By the end of 2014, ETFs held more than 1,600 tonnes of gold, equal to about six months of mine supply.
ETFs Have Had a Volatile Impact on Gold
Since their introduction, gold ETFs have been one of the most volatile sources of demand and, at times, supply. Through 2012 as gold prices rose, investors ploughed money into ETFs, leading to peak holdings of nearly 2,700 tonnes, equivalent to about one year's mine supply.
As prices dropped in 2013 and 2014, ETF investors sold in droves, flooding the market with more than 1,000 tonnes of net supply.
ETF Holdings Track Gold Prices
The reasons for investing in gold through jewellery, bars, or coins, are the same for ETFs. However, we lack the country-level ownership data of ETFs to appropriately gauge the likeliness of ETF investors to invest in gold over alternative assets. However, there is a strong historical relationship between the actual spot gold price and the level of gold ETF holdings, as measured in tonnes to avoid counting the impact of price in both factors: The higher the gold price, the more money flows into gold ETFs.
Given the strong historical relationship between ETF holdings and gold prices, we use our gold price forecast through 2020 to estimate ETF holdings. Since we expect neither a momentous jump nor a cratering in gold prices, gold ETF holdings should be fairly stable. In other words, despite the strong historical impact that ETFs have had on gold in some years, we expect them to have little impact on long-term gold volumes.
In theory, we would expect gold ETF holdings to hold some relationship to the value of the equity market. If a market portfolio held a fixed weighting of gold, we would expect the portfolio to acquire more gold as the market portfolio rises in value in order to maintain the fixed weighting. However, this doesn't appear to match actual market behaviour when it comes to ETFs.