Gold ETFs play an important role in the global gold marketplace. They allow institutional and individual shareholders seeking a diversified investment strategy. A gold ETF, (exchange-traded fund), is a commodity ETF that holds derivative contracts backed by gold. Gold ETF’s can either directly track the price of gold or offer exposure to the global gold mining industry. They have become a significant factor in global gold demand.
Total assets under management in Gold ETFs have been trending higher for years.
According to the World Gold Council, in September 2019 funds backed by physical gold saw their position reach a record high of 2,855 tons. Under the threat of the spreading financial fallout from the coronavirus in Q1 2020 they climbed further, to 3,185 tons. The trend continued in the first two month of the second quarter. Another 154 tons were added to bring to total to 3510 tons. Altogether, over the 12 months ending May 2020, ETF gold holdings nearly doubled.
Although they have been biting their tongues for years, some powerful foreign governments are now openly bristling at this state of affairs. Making common cause to change it. They are racing to establish bi-lateral and multi-lateral institutions to bypass the old order, the “exorbitant privilege” enjoyed by the dollar. The accompanying movement of central banks around the world, most notably Russia and China, to de-dollarize by repositioning their reserves out of dollars and into gold may prove to be the most significant financial megatrend of this decade.
It is a shift in global monetary management that can damage the dollar badly and propel gold much higher. Since 2006 China’s gold reserves have grown from 600 tons to 1,948 tons. Russia’s have swollen from 400 tons to 2,299 tons today. Central bank gold buying slowed marginally in the first quarter of 2020, another consequence of COVID-19. While central banks added 145 tons of gold in the quarter, this figure was 8 percent lower than the prior year’s first quarter.
Central banks buying slowed, but stayed in line with longer-term average level.
The Central Bank of Russia announced suspension of its gold buying program as of April 1, 2020. The World Gold Council says that “the bank gave no reason for the move.” However, petroleum and natural gas are Russia’s leading “cash crops.” Sharply lower energy prices ushered in by COVID-19 have unquestionably impacted the country’s foreign currency earnings.
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