High Demand For Gold ETFs In The West Is Driving Gold Prices

Amid coronavirus pandemic fears, investors in North America and Europe are accumulating gold, a safe haven asset, helping push prices in the international market to a new eight-year high.

In fact, according to a Bloomberg report, purchases in the form of gold funds made by westerners have compensated for the collapse in demand for physical gold among traditionally large consumers in China and India.

According to data compiled by Bloomberg, inflows into gold ETFs (exchange-traded funds), largely from the two advanced continents, are close to the annual record set in 2009.

On the other hand, demand in China and India, the world's biggest buyers of gold in the form of bars, coins and jewellery, has plunged after the pandemic stalled imports and closed non-essential shops. Experts predict slow recovery in sales due to an increase in the metal's prices.

Spot gold, the international benchmark for gold prices rose by 17 percent in 2020. Last week, gold futures on Comex (international commodity exchange for trading metals) topped the $1,800 an ounce mark for the first time since 2011, also driving rates in India and other Asian markets.

According to the Bloomberg report citing forecasts by precious metals consultancy Metals Focus Ltd, China's gold consumption in 2020 is expected to fall 23 percent and India's demand by 36 percent. In India, which is dependant on imports for almost all of its yellow metal demand saw a 99 percent decline in gold imports in April and May, amid lockdowns, job losses and subdued consumer spending on weak economic growth prospects.

Meanwhile, demand for gold ETFs has surged over worries about the economic outlook, negative real rates and currency debasement. According to Bloomberg data, total holdings of physical gold in ETFs have risen by more than 600 tons this year. Inflows into ETFs have surpassed retail purchases in China and India in the first quarter of 2020, for the first time since 2009. While consumer data isn't available yet for the second quarter, the Bloomberg report said ETF buying increased between April and June.

Fear-driven investment demand in developed countries has contributed about 18 percent to this year's gain in gold prices, while weaker buying by emerging-market consumers provided an 8 percent drag, Goldman Sachs Group Inc. estimated in a June note.

Prices could now go both ways. Prices of the yellow metal now hold a risk of losing support if ETF inflows slow down, or rates could pick up if demand in China and India revive.