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ETF Inflows Propping Up Gold Prices

With fundamentals outside of investor demand looking weak, we expect gold prices to fall through 2018.

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Breaking a long trend, demand for gold jewelry in China and India has plummeted in recent years, dragging global demand to its lowest level in seven years. But despite this massive decline in the largest single source of gold demand, prices have proved resilient, largely due to strong investor demand. In the face of ongoing interest rate hikes by the U.S. Federal Reserve, exchange-traded fund holdings have risen to levels last seen in 2013, a period defined by much higher gold prices.

Prevailing prices of nearly $1,300 per ounce have limited fundamental support. Continued rate hikes threaten to reverse last year’s near-record ETF inflows, as still-manageable inflation would push real interest rates well above levels that attract investor interest. We expect gold prices to fall in the remainder of 2017 and into 2018 before increased Chinese and Indian jewelry demand catalyzes a rebound. Investor outflows can strike suddenly, but a full recovery in jewelry sales will take time.

Kristoffer Inton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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