CHARTS: 2016 gold price rally's all about ETFs, hedge funds

On Wednesday, gold snapped back some of its recent losses adding nearly $10 in New York in another day of brisk trading. At $1,275 an ounce, gold is up just over 20% since the start of the year.

A new study shows the rally – the best start to the year in almost three decades – has been almost entirely driven by investors in physical gold-backed exchange traded funds and large-scale futures speculators like hedge funds.

According the the World Gold Council's Gold Demand Trends study ETF investors who've been stocking up on the metal right out of the gate in 2016 were behind the best ever first quarter for the metal and the second largest quarter on record after Q1 2009.

Investment demand was 122% higher than Q1 2015 and increased three-fold quarter on quarter

Overall global gold demand reached 1,290 tonnes in the first quarter of 2016, a 21% increase compared to the same period last year. The jump was entirely driven by investment demand which was 122% higher than Q1 2015 and increased three-fold quarter on quarter.

Slight gains were registered in bars and coins investment and ETF demand surged to 364 tonnes of inflows worth $13.8 billion in Q1 which more than reversed the cumulative outflows from 2014 and 2015. By contrast in 2015 the gold price also made a strong start to the year but only 26 tonnes flowed in funds.

The WGC says the surge in gold-backed ETF purchases was  fuelled by global economic uncertainty and worries about the impact of negative interest rate policies in place in many developed markets around the world. The industry says ETF buying has continued in developed markets with concerns about Britain exiting the European Union adding to demand.

All other demand categories contracted sharply. Total consumer demand was down 13% compared and jewellery demand plunged 19% compared to last year and 27% over the December quarter. The weakness in the sector was the result of slack in China and a 42-day strike by jewellers in India. Central bank purchases declined 3% compared to 2015, but fell more than 30% quarter on quarter.

2016 gold price rally's all about ETFs, hedge funds

According to the WGC total holdings in ETFs stood at 1,974.3 tonnes at the end of March. Around 40% of total global holdings is held in SPDR Gold Shares (GLD) and the New York-listed  fund has since added a net 20 tonnes to its vaults.

While retail and institutional investors have been pouring money into ETFs, hedge funds have been moving even more aggressively into paper markets

On proportional basis that would push global ETF tonnage to over 2,000 tonnes, surpassing the reserves of The People's Bank of China and the Central Bank of Russia which hold 1,797 tonnes and 1,460 tonnes respectively.

While retail and institutional investors have been pouring money into physically-backed gold ETFs, large scale futures speculators have been moving even more aggressively into paper markets.

Hedge funds dramatically raised bearish bets on gold during the final months of 2015 pushing the overall market into a net short position – bets that gold could be bought back at a lower price in the future – for the first time since at least 2006, when government first started to collect the data.

The trend was thoroughly reverse this year however with investors building large bullish positions. Last week hedge funds pushed longs – bets that the gold price will rise – to the highest level since August 2011 when gold was setting records above $1,900.

On a net basis futures investors have built up long positions equivalent to 23.4 million troy ounces (726.6 tonnes).  After adding ETF inflows this chart shows just how dramatic the build-up in gold has been this year.  According to Ole Hansen, chief commodity strategist at Danish bank Saxo, Comex futures positions and gold ETFs taken together is at the highest level since April 2013:

CHARTS: 2016 gold price rally's all about ETFs, hedge funds

Source: Saxo Bank