Are Net Inflows Into Gold ETFs Declining?

Includes: GLD, IAU
by: China Play Stocks

In a recent article, Morningstar made this claim to support its bearish views on gold:

We doubt that gold ETFs can continue to attract the tremendous amount of inflows over the long run, like they have done so far in their brief history. In fact, we've already seen net inflows into gold ETFs in 2010 (and so far in 2011) decline from their 2009 highs.

I initially dismissed this assertion by pointing simply to the law of large numbers. Inflows can't keep increasing at the same pace as gold ETFs keep growing. But then, curiosity got the better of me, and I decided to dig a little deeper. Morningstar has not provided any numbers or facts to support their assertion. I just assume they mean the overall flows across all major gold ETFs. I provide two sets of facts to show that they are wrong.

First, I provide two tables from Bloomberg that do not show any evidence of a slowdown in gold ETF inflows. Second, I show the sharp increase in the rate of inflows into the gold ETF IAU, which indicates that this cheaper ETF is taking market share away from the more popular gold ETF GLD.

Bloomberg's tabulation of gold holdings by ETFs as of April 22, 2011 (click to enlarge images):

Compare the preceding tables with the following two tables which are Bloomberg's tabulation of gold holdings by ETFs as of Sept. 28, 2010:

Now, look at this chart that shows that gold holdings by IAU have been increasing sharply over the last 6 to 8 months. This implies that net inflows into IAU have been increasing sharply as well.

As this Financial Times article points out, in July 2010, IAU reduced its expense ratio from 0.4% to 0.25%. GLD still charges 0.4%. This has resulted in IAU taking market share away from GLD. Even big investors like George Soros have been shifting from GLD to IAU. Why pay a higher fee for the same commodity? Perhaps, this had Morningstar confused. GLD inflows are probably increasing at a slower pace compared to 2009. But, IAU is on a tear as the above chart shows.

Again, the law of large numbers means that inflows into gold ETFs will slow down. The numbers I have presented here do not indicate any dramatic slowdown over the last 6 to 8 months. Am I missing something?

Disclosure: I am long IAU, GLD.

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