ETF Monthly commentary

Gold ETFs added 21% in 2020 dominating gold demand

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July highlights

Gold-backed ETFs and similar products (gold ETFs) recorded their eighth consecutive month of positive flows, adding 166 tonnes (t) in July – equivalent to US$9.7bn or 4.1% of assets under management (AUM). Global holdings have once again reached a new all-time high of 3,785t1 and the price of gold hit a record high of US$1,976/oz by the July-end, leaving global AUM standing at $239bn. Global net inflows of 899t (US$49.1bn) to date are considerably higher than previous annual highs, and the trend of inflows has continued in the first few trading days of August as the price of gold has breached US$2,000/oz.

 

ETF flows 1

ETF flows chart

Sources: Bloomberg, Company Filings, ICE Benchmark Administration, World Gold Council; Disclaimer

Regional overview

While all regions had net inflows in July, North American funds, once again, led by a significant margin, accounting for 75% of global net inflows. The region added 118t (US$7.0bn, 5.5% AUM). European-listed funds added 40t (US$2.1bn, 2.1% AUM). Asian-listed fund holdings rose meaningfully during the month, by 4.9t (US$370mn, 5.6% AUM). Funds listed in other regions registered a 3.4t (US$218mn, 5.5% AUM) gain.

Conflicting messages between stock returns and economic indicators

Overall, July was notable for several ‘all-time’ records:

  • The S&P 500 reached a monthly closing high
  • US 10-year yield finished at an all-time low of 0.53%
  • The highly concentrated Nasdaq (with the top five companies representing 45% of the index) reached record levels, increasing 20% in 2020
  • Silver had its strongest monthly performance ever, rallying 34%
  • Gold reached its highs, rallying by 11% and, as of the end of July, is higher by nearly 30% on the year.

The rebound in China’s economy is reflected in the y-t-d return of the CSI300, which surged 14% in July. However, bullish sentiment is not as strong across many other regions, with stocks in Europe, Japan and EM remaining lower on the year.

Yet, economic numbers suggest a contrary environment to that reflected by equity markets and other risk-assets. Just last week GDP numbers in the US and Europe showed the sharpest seasonally and inflation-adjusted rate decreases annually on record (US: -33%, Europe: -40%). The q-o-q numbers are just as troublesome (US: -9.5%, Europe: -12%). Finally, while employment numbers improved in the US a few months ago, they have since reversed course as COVID cases have increased.

Can gold price strength continue?

We published two reports in late July addressing gold’s strength this year and some potential drivers for its direction in the near-term. Investment Update - Gold hits record high: sprint or marathon? highlights a number of important points. First, while the price of gold reached all-time highs in nominal terms, it remains below the inflation-adjusted record, which is US$2,800 or 42% higher. Additionally, the Commitment of Traders (COT) report for gold COMEX futures often highlights speculative positioning, which can sometimes serve as a contrary indicator at extreme bullish or bearish levels. While bullish sentiment was at extreme levels in February 2020 at 1,209t (US$63bn)2, it subsided meaningfully to 863t in July (US$55bn). Finally, in our blog Is gold ready for a pause technically?, we noted a few technical indicators that suggest gold could pause, at least in the short run.

Global gold trading volumes rose sharply to US$194bn a day in July, up 24% from US$167.6bn in June. Daily trading volumes remain below the y-t-d record of US$233bn seen in March, but comfortably above the 2019 daily average of US$145.7bn. Global gold futures interest spiked in July to US$120bn, above the US$98bn from June.

Looking ahead

We often discuss the fundamental drivers of gold as being a function of economic expansion, risk and uncertainty, opportunity cost and momentum. The current market environment highlights the multi-faceted nature of gold price behaviour. As we noted in our recent Gold Demand Trends: Q2 2020, economic weakness has significantly hurt jewellery, bar and coin and technology demand, which have averaged 86% of total gold demand over the past 10 years. But geopolitical and economic uncertainty remains supportive for gold investment, and with real rates near or at all-time lows globally, the cost of holding gold remains low. Finally, investment demand and momentum appear to be more than offsetting the shortfall driven by economic weakness . With the recent demand shift, only 32% of demand came from jewellery, bar and coin and technology in Q2 2020, with the remainder coming from investments – like gold ETFs – and central banks.

In our Mid-Year Outlook we noted a growing consensus that the V-shaped recovery may be morphing into a U-shaped recovery, or that we could even experience more of a W-shaped recovery amidst subsequent waves of infections. At present, COVID cases appear to be resurfacing, not just in the US but in other countries that had earlier appeared to contain the outbreak. The ultimate effect of this is still very much unknown.

The true state of the economy may not be reflected in across all market environments. Record stimuli and easy money by central banks appear to have driven investments in equities higher, despite weak economic indicators. Ultimately, it could be the behaviour of central banks – with their continued expansionary monetary policy – that drives gold higher. This impact played key role in prompting the multi-year bull market in the price of gold following the Great Financial Crisis and subsequent Quantitative Easing.

Regional flows3

North American funds dominate inflows in July

  • North American funds had inflows of 118t (US$7.0bn, 5.5% AUM)
  • Holdings in European funds increased by 40t (US$2.1bn, 2.1% AUM)
  • Funds listed in Asia saw holdings rise by 4.9t (US$370mn, 5.6% AUM)
  • Other regions had inflows of 3.4t (US$218mn, 5.5% AUM).

Individual flows

SPDR® Gold Shares and iShares Gold Trust represented 61% of all global inflows in July

  • In North America, SPDR® Gold Shares led global inflows, adding 63t (US$3.8bn, 5.6%), while iShares Gold Trust added 35.5t (US$2.1bn, 8.3%). SPDR® Gold MiniShares led low-cost inflows adding 6.9t (US$414mn, 16.4%), followed by Aberdeen Standard Physical Gold Shares, which added 2.6t (US$160mn, 7.3%). It is worth noting that all these funds, reached record levels of AUM.
  • In Europe, Invesco Physical Gold Etc added 11.8t (US$696mn, 6.1%) and iShares Physical Gold added 9.4t (US$581mn, 4.5%). WisdomTree Physical Gold was the only fund globally with outflows more than 1t with 1.8t (US$116mn, 1.4%) coming out during the month.
  • There were minimal noteworthy individual fund flows in the Asian and Other regions.

Long-term trends

Y-t-d gold ETF inflows have surpassed the largest annual gain of 646t seen in 2009

  • Over the first six months of 2020 global gold ETF holdings (in tonnage terms) have increased by 31%
  • Holdings in both tonnage and value terms continue to reach new highs
  • North American and European funds now account for 52% and 43% of global tonnage holdings, respectively. The market shares from these two regions have been diverging since late March
  • Low-cost gold-backed ETFs in the US now stand at 120t (US$7.6bn) in collective holdings, surpassing the entire Asian region4

Footnotes

  1. We regularly review the global gold-backed ETF universe and adjust the list of funds and holdings based on newly available data and information.

  2. Net longs represent Money Manager and Other Net long positioning in the COMEX futures market.

  3. We calculate gold-backed ETF flows both in ounces/tonnes of gold and in US dollars because these two metrics are relevant in understanding funds’ performance. The change in tonnes gives a direct measure of how holdings evolve, while the dollar value of flows is a finance industry standard that gives a perspective of how much investment reaches the funds. There are some months where the reported flows measured in tonnes of gold and their dollar-value equivalent seem inconsistent across regions. Both figures are correct. The disparity is due to the interaction between the performance of the gold price intra-month, the direction and movement of the US dollar and the timing of the flows. For example, hypothetically, if European funds were to experience outflows early in the month when the price of gold was low but gained assets later in the month when the price of gold increased, and/or if the euro/dollar currency rate moved meaningfully when there were flows, there might be a discrepancy between tonnage change and flows.

  4. Low-cost US-based gold-backed ETFs are defined as exchange traded open-ended funds listed in the US, backed by physical gold, with annual management fees of 20bps or less. At present, these include Aberdeen Physical Swiss Gold Shares, SPDR® Gold MiniShares, Graniteshares Gold Trust, and Perth Mint Physical Gold ETF.

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