Authored by Mike Maharrey via Money Metals,

Gold-backed exchange-traded funds (ETFs) reported net inflows of gold for the first time in 12 months in May.

Funds based in Europe and Asia led the way as total gold holdings by ETFs globally rose by 8.2 tons.

ETFs globally now hold 3,087.9 tons of gold. 

Assets under management (AUM) by gold-backed ETFs rose to $234 billion, a 2 percent increase. AUM growth was due to a combination of inflows of metal and rising gold prices. It was the highest AUM reported by gold-backed funds globally since April 2022.

European funds reported gold inflows of 5.6 tons. This ended a 12-month streak of declining gold holdings. According to the World Gold Council, inflows were mainly driven by expectations that the European Central Bank would cut rates in early June (which they did), and the demand was primarily reflected in Swiss and German funds.

Asian funds reported their 15 consecutive months of gold inflows, as they have bucked the trend in Europe and North America. This reflects a broader trend of gold moving from West to East. Asian ETFs reported a 5-ton increase in gold holdings. 

China has driven Asian ETF demand. According to the WGC, local gold prices rallying to all-time highs and continued yuan weakness were both drivers of gold ETF demand in the country. Japan also reported healthy inflows amid attractive local gold price gains. 

North American funds reported outflows of gold after two months of rising gold holdings. North American ETFs reported a 2.3-ton decline in gold holdings in May.

Even with the outflow of metal, the region’s total AUM climbed further to $119 billion thanks to an increasing gold price. 

According to the World Gold Council, hawkish Fed minutes from its May meeting weighed on the gold prices, leading to outflows in North American funds. The rallying equity market may also have diverted investor attention away from gold.

Inflows of gold into ETFs can have a significant impact on the global gold market by pushing overall demand higher.

ETFs are a convenient way for investors to play the gold market, but owning ETF shares is not the same as holding physical gold.

A gold ETF is backed by a trust company that holds metal owned and stored by the trust. In most cases, investing in an ETF does not entitle you to any amount of physical gold. You own a share of the ETF, not gold itself.

ETFs are relatively liquid. You can buy or sell an ETF with a couple of mouse clicks. You don’t have to worry about transporting or storing metal. In a nutshell, it allows investors to play the gold market without buying full ounces of metal at the spot price. 

Since you are just buying a number in a computer, you can easily trade your ETF shares for another stock or cash whenever you want, even multiple times on the same day. Many speculative investors take advantage of this liquidity.

But while a gold ETF is a convenient way to play the price of gold on the market, you don’t actually possess any gold. You have paper. And you don’t know for sure that the fund has all the gold either, especially when the fund sees inflows. In such a scenario, there have been difficulties or delays in obtaining physical metal.