By now, most everyone is well-aware of the enormous sums of money that have flowed into gold ETFs this year. The SPDR Gold Trust (GLD | A-100) is leading all ETFs with year-to-date inflows as of May 11 of $7.7 billion, according to FactSet data.
Combine that with the $1.7 billion that's gone into the iShares Gold Trust (IAU | B-100), and we're talking about a whopping $9.4 billion worth of inflows into these two ETFs in just a little over five months (for comparison purposes, the two funds had combined outflows of $2.4 billion in 2015 and outflows of $3.5 billion in 2014).
In fact, the buying in gold ETFs this year has been so large that the World Gold Council reported yesterday that global gold demand grew at its fastest pace ever in the first quarter―21% year-over-year. The buying in these funds was so big that it offset significant declines in demand from the two largest gold-consuming markets: China and India.
According to the WGC, consumer demand in India dropped 39% year-over-year in the first quarter, while demand in China dropped 12%.
Q1 Gold Demand
Source: World Gold Council
In other words, the buying of gold ETFs was single-handedly responsible for this year's gold rally.
Just who is buying, and what in the world is going on to cause so many investors to rush into gold all of a sudden?
Broad Investor Base
The World Gold Council, sponsor of the largest gold ETF, GLD, believes there are many types of investors buying gold ETFs this year. Inflows into these funds have come "from a broad investor base, from institutional to private," according to the council's Demand Trends report.
Institutions have been the "driving force," but retail investors are also a "considerable contributor" to the buying. The WGC added that most of the investment demand is coming from Western investors, though the nascent Chinese gold ETF market saw a doubling in its assets as well.
Three Reasons For Buying
Just as the investor base for gold is quite diverse, so too are the reasons for buying the yellow metal.
Some of the buying in gold ETFs could be related to performance-chasing. Up more than 20% so far this year, the yellow metal is one of the top-performing assets of 2016.
YTD Gold Price
That said, performance-chasing likely isn't the only―or even the most important―reason for gold's newfound popularity among ETF investors.
The WGC cites three reasons in particular for the buying. The first is the negative-interest-rate policies implemented by central banks in Japan in Europe. These policies "significantly reduced the appeal of sovereign bonds as stable, low-risk assets," said the council.
The second factor is China's devaluation of the yuan, "which fueled fears over the country's economic health and the potential impact on global growth."