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ETF demand is now the driver for gold prices, not paper markets – Bank of America

The gold market has become a dichotomy of forces as investor demand into gold-backed exchange-traded funds (ETFs) is now playing a bigger role in driving prices than the futures paper market, according to research form Bank of America.


A lot of attention is now being paid to the precious metals markets as investors look for safe-haven assets in an environment of falling bond yields and growing inflation threats. However, while most people have been paying attention to the recent price action in futures markets, Michael Widmer, commodity strategist at Bank of America and author of the report, suggest investors keep an eye on flows into ETFs.


“While institutional investors, who in the past often traded futures, still hold a large share in open interest, retail investors have become materially more important,” Widmer said.


Last week gold prices in Comex December futures contracts dropped nearly 5%, its biggest weekly decline since March, when financial markets were roiled because of the global COVID-19 pandemic. Meanwhile, holdings in SPDR Gold Shares (NYSE: GLD), the world’s largest gold-backed ETF, saw holding fall by roughly 1%.


According to Widmer, the gap between the futures market and ETF market can cause price dislocations.


“GLD traded meaningfully above the fundamentally justified [net asset value (NAV)] several times during summer on extremely high inflows, although they have normalized since,” he said.


It’s no secret that investment demand in gold-backed ETFs is playing a more prominent role in the marketplace. According to data from the World Gold Council, investment demand hit a record high in the first half of 2020, rising by 646 tonnes.


Widmer put that growth into a little more perspective. He noted that assets under management in the gold ETF space have nearly doubled in the last four years.


He added that gold held by funds in London Bullion Market Association vaults accounts for nearly 40% of all the precious metals.


Bank of American made headlines in April after raising its gold market forecast, saying that prices could push to $3,000 an ounce within 18 months.


“As central banks rush to expand their balance sheets and backstop the economy, a lot of risks could effectively be socialized, boosting the appeal of gold,” the analysts said in the spring.


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