That the price of gold has leapt 25% in dollar terms this year comes as little surprise, given the prevailing global uncertainty. What really stands out about this rally is the huge part that exchange-traded funds played in it. 

First-half flows into gold ETFs of 579.2 tonnes outdid the previous record set in the first six months of 2009, in the teeth of the global financial crisis (see graph below), according to a new report from the World Gold Council (WGC). 

The first-half 2016 ETF flows also represented almost half of total investment demand for the metal in H1 – the rest being accounted for by bars and coins. The rise in assets was particularly startling as it followed outflows of 616.1 tonnes over the preceding 10 quarters. 

ETFs “really stole the show” in terms of driving demand for the metal in the first half, said the WGC, a trade body backed by mining companies. 

The value of gold-backed ETF assets rose by 69% ($38.1 billion) in the first half to $93 billion, the highest level since the third quarter of 2013. Indeed, State Street’s SPDR Gold Trust, the biggest gold ETF, saw the biggest net inflows of any ETF globally ($12.53 billion) in the year to the end of July, boosting its AUM to $41.32 billion. 

Moreover, ETF investment helped drive first-half gold demand overall to a record level of 1,063.9 tonnes (worth $41.6 billion), 16% higher than the previous H1 high in 2009, noted WGC. Consequently, for the first time on record, investment has been the biggest component of gold demand for two consecutive quarters, added the report. 

A ‘perfect storm’ for gold

WGC said pent-up demand among western investors had been triggered by heightened uncertainty generated by a ‘perfect storm’ of conditions: unparalleled loosening of global monetary policy (including widespread negative interest rates); western political developments – namely, the Britain voting to leave the EU on June 23 and the looming US election; and the slowing pace of US rate hikes and consequent slowdown in dollar strength.

“The apparent end to the downtrend in the gold price has been a further cause (as well as an effect) of improved investor sentiment,” added the report. 

However, the comparatively meagre $352.49 million of net flows into the SPDR Gold Trust in July suggests the momentum could be slowing, something WGC concedes may be the case. 

“Although there is currently no indication that demand will come to a halt, there is evidence of profit-taking and it would be prudent to assume that recent momentum may be difficult to sustain,” said the WGC report. 

Still, it added, “the positive shift in attitudes among large-scale western investors in particular appears to have solid foundations. And we should see demand build on those during the quarter ahead.”

For example, the report said, the after-effects of the Brexit decision are likely to be reflected in Q3 data: “Those effects are likely to be global.” 

WGC also pointed to instances of rising interest in gold in China. In the seven days after the Brexit vote, the search index for the keyword ‘gold’ compiled by Chinese search engine Baidu surged 44% year-on-year. And on the day of the referendum, the index increased threefold. 

Similarly, Google Trends reported a more-than 500% spike in searches for the term ‘buy gold’ on the day of the referendum, said WGC.

Another who is bullish on the metal is Geir Lode, head of global equities at UK fund manager Hermes. “Over the next two to three years we believe an increased allocation to gold is likely due to macro-economic uncertainty, higher geopolitical risk, and low or even negative interest rates,” he said. 

His preferred way to access the opportunity is via UK-listed Randgold Resources, a mining company with a focus on Africa.