Why Gold ETF Inflows Surged Even as the Metal’s Price Fell

Investors are hunting for portfolio protection and diversification in a pot at the end of the rainbow. 

Inflows into gold-backed exchange-traded funds (ETFs) recently hit a four-year high, according to Bloomberg. The World Gold Council, meanwhile, reported that global gold ETFs brought in $10 billion in September, boosting third-quarter inflows to a record $31 billion. The US alone added $3.8 billion last month. 

Typically, investors sell gold, a nonyielding asset, when interest rates rise, in order to take advantage of interest-bearing assets. When rates climb, the US dollar also tends to get stronger and gold becomes more expensive (and less appealing) to foreign investors. But while gold’s price has risen in recent years, much of September’s inflows took place as the precious metal’s price was falling and interest rates moved higher. 

“That suggests investors are looking beyond the next Federal Reserve decision or short-term market fluctuations,” said Matthew Smart, chief investment officer at WWM Investments. “Investors are looking for ways to preserve wealth and diversify against risks that may persist well beyond the current economic cycle.” 

Leprechaun-Style Diversification  

The recent move back into gold was part investors reengaging, following the tactical low from over the summer, but also part diversification need as long-duration Treasurys remain challenged, said Todd Sohn, chief ETF strategist at Baird Strategas. 

Gold has long been a safe-haven asset thanks to its scarcity, liquidity and historical ability to preserve purchasing power. Recently, that appeal has grown: 

• Investors and portfolio managers are increasingly interested in assets that offer diversification beyond traditional stocks and bonds, particularly those whose performance is driven by different economic factors, Smart said. 
• Gold has delivered impressive returns over the past several years, and that performance has brought renewed attention to an asset class that was historically viewed primarily as a defensive holding, he added. 

But near-term inflows for ETFs linked to the precious metal aren’t necessarily shiny. 

“Gold has competition in the form of higher real rates now and a recent USD rally too. So, I am curious how sticky the recent inflows will be,” Sohn says. “It’s a two-part equation with this, one being how gold performs going forward, and two, what rates do.” 

Not Always Lucky: Even though gold has enjoyed an “extraordinary run” over the past several years, the price fall in September was a good reminder that even strong investor demand doesn’t guarantee higher prices, Smart said. “Like any investment, the price you pay matters, and investors should be careful not to let recent performance dictate their long-term decisions.”