Inflows into Gold ETFs Set to Rise

By Ashitha Shivaprasad

(Reuters) – Inflows into gold exchange-traded funds (ETFs), especially from Western investors, are expected to increase in coming months, providing more positive stimulus for the already record high bullion prices, analysts say.

Gold prices have surged about 27% this year, surpassing $2,600 per ounce, largely benefiting from looser central bank monetary policies and geopolitical tensions.

Interest rate cuts in the U.S., Europe, and China have bolstered bullish sentiment, with some investors targeting a record milestone of $3,000.

Exchange-traded products (ETPs), or ETFs, allow investors to gain exposure to assets like gold without taking physical delivery. An increase in ETP holdings is significant for prices as they are backed by the physical commodity.

Higher inflows will reduce the available supply of gold in the market, further supporting prices.

"Now that the rate cutting cycle has commenced, we expect ETP inflows to accelerate, supporting the next leg higher in gold," said Suki Cooper, an analyst at Standard Chartered. "ETP flows, which usually correlate with real yields and the dollar, have turned positive. The majority of inflows have come from Europe, but North America has recently shown significant interest."

According to the World Gold Council (WGC), global gold ETFs saw inflows of 28.5 tonnes, or $2.1 billion, in August, with all regions reporting positive flows, particularly from Western funds.

North America contributed 17.2 tonnes, or $1.4 billion, last month. Softer U.S. economic data, dovish Fed comments, a declining dollar and yields, along with lower opportunity costs, fueled these inflows,

This follows three years of outflows from gold ETFs due to high global interest rates. The recent four months of inflows have only reduced the year-to-date losses to a net outflow of 44 metric tons.

Last week, the Federal Reserve began a series of anticipated interest rate cuts, starting with a half-percentage-point reduction. The European Central Bank also reduced rates in June and earlier this month.

China's central bank announced broad monetary stimulus and measures to support the property market, planning a 50 basis point cut to banks' reserve requirements to revive a struggling economy facing deflationary pressures.

Major banks like J.P. Morgan, Goldman Sachs, Citi, and UBS have reaffirmed their bullish outlook on gold, predicting that prices will continue to rise alongside ETF holdings.

"Fed cuts are likely to draw Western capital back into gold ETFs, which was largely absent from the gold rally in the last two years," Goldman Sachs commented.

J.P. Morgan emphasized that retail-focused ETF investments will be crucial for sustaining a gold rally, projecting prices could peak at $2,850 by 2025.

Spot gold reached a record of $2,639.95 per ounce on Tuesday, driven by expectations of further monetary easing and ongoing geopolitical tensions. Lower interest rates lessen the opportunity cost of holding zero-yield bullion, making it a safe asset amid financial turmoil.

"The basis of the current spike in ETF demand stems from dropping rates, but it raises the question of whether investors are willing to buy at these elevated prices," said Ole Hansen, head of commodity strategy at Saxo Bank.