Gold ETF Holdings Suggest a New All-Time High May Be Nigh

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on Apr 20, 2021

Updated: Dec 19, 2022

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Rising Gold ETF volumes suggests we may soon see a new all-time high

Gold is the only form of money to have survived for thousands of years, but it’s not the same kind of money as fiat currencies at the heart of today’s financial system or the new digital assets that are set to challenge the status quo.

In the same way that fiat currencies displaced gold, could cryptocurrencies lead the world to a new financial system? The quick answer is no.

What is likely to happen is that the financial markets accommodate the new digital assets alongside traditional currencies. Indeed, cryptocurrencies have led to the world’s central banks to consider developing their own digital currencies. In other words: gold, fiat currencies, and digital currencies will coexist.

At a time when central banks fuel fears of rising inflation, gold should serve its anti-inflationary purpose, yet it has declined since hitting a new all-time high in the summer of 2020. Why?

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Investors Turning Their Attention Back to Paper Gold

There are many ways to invest in gold. One way is to own physical gold, which is expensive to transport and store, not to mention hard to liquidate into cash in times of a crisis. Another way is to own shares of a gold mining company that pays dividends as an added incentive.

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Financial innovations such as exchange traded funds (ETF) have driven the gold price in the last decade, and they offer another way to hold gold without storing the physical stuff or owning gold mining stocks. As can be seen in the chart, gold ETF holdings — also called “paper gold” — declined significantly after the all-time high of 2020. But recently, the weekly change in volume reflects less downside pressure, in line with the bounce in the spot price from $1,675 to $1,770.

Coincidence or not, this comes at a time when the cryptocurrency market has suffered double-digit losses. If investors reassess the risk of cryptocurrencies and turn their attention back to paper gold, the yellow metal could see more upside.

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