Gold-backed exchange-traded funds in the first quarter of 2021 logged the largest outflows in more than four years, sapped by rising interest rates, but jewelry sales helped offset pressure on global gold demand, according to the World Gold Council.
Outflows from gold ETFs totaled 177.9 tonnes, or $9.5 billion, driven by Western markets as US interest rates spiked and the US dollar rose, the organization said Thursday. The performance sharply lagged inflows of 299.1 tonnes during the same quarter last year.
The outflows contributed to a 23% fall in global gold demand from a year earlier, to 815.7 tonnes.
“Outflows quickly mounted through the quarter as inflationary expectations — and, by extension, expectations of higher interest rates — were unleashed,” said the council in a statement. “Outflows of this magnitude were last witnessed in Q4 2016, a time when there was a similar re-appraisal of the expected course of US growth and interest rates.”
The acceleration of the US economy’s recovery from the COVID-19 pandemic has prompted economists to raise their growth and inflation forecasts and investors during this year have sold off Treasury bonds as they anticipate a pickup in consumer price inflation beyond the Federal Reserve’s target of 2%.
The bond selloff lifted long-dated yields, notably the 10-year yield to 14-month highs above 1.7%, signaling higher borrowing costs.
While the threat of inflation can boost the gold’s appeal as a hedge, rising interest rates hurt its appeal because the metal offers no yield.
Long-dated yields have backed off from this year’s highs but yields rose Thursday after the Commerce Department said the US economy expanded by 6.4% in the first quarter. While global gold demand fell on a year-over-year basis it was on par with the last three months of 2020, the WGC said.
The fall in ETF demand was mitigated by demand for physical bars, coins and jewelry. Retail gold purchases climbed about 36% to 339.5 tonnes, swayed by “price-driven ‘bargain-hunting’ and widespread concern over growing inflationary pressures,” the WGC said. The value of gold jewelry purchased by consumers surged, marking a 52% annual increase following an “extremely weak” first quarter of 2020.
Gold prices fell by 10% during the first quarter of this year, which helped stoke consumer demand.
Overall, the metal “retains its relevance in well-balanced portfolios, especially with a risk of inflation looming. Looking ahead to the rest of the year, we see reasons to be optimistic about the gold market as its main drivers remain well supported,” Louise Street, senior markets analyst at the World Gold Council, said in a statement.