ETF Monthly commentary

Gold ETFs lost 2% of holdings in February as gold fell and rates rose

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February highlights

Global gold ETFs lost 84.7 tonnes (t) (-US$4.6bn, -2.0% AUM) in February, marking outflows for the third time in four months, and the seventh worst historical monthly holdings loss. Global assets under management (AUM) now stand at 3,681t (US$207bn), levels last seen in June 2020, when the price of gold was near the February closing level of US$1,743/oz.1 

 

ETF flows chart

Data as of

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

Regional overview

At a regional level, outflows were mostly driven by North American funds -71.2t (US$4.1bn, -3.4%), mainly from the largest funds, in contrast with low-cost gold ETFs which experienced net inflows – perhaps suggesting increased strategic buying amid momentum selling. European funds saw outflows of -23.8t (US$1.1bn, -1.1%), mainly from UK funds. Funds in other regions had minor outflows of -0.3t (US$27mn, -0.7%). The one bright spot was Asia, with significant inflows of 10.6t (US$596mn, +8.4%), primarily directed to Chinese- and Indian-listed funds. In China, investors used the gold pullback, as well as the first market pullback in the CSI 300 since September, to add to ETF holdings. Also, the price discount in China turned positive in the first two months of the year, highlighting increased demand.

Price performance and trading volumes

Gold in US dollar terms had its largest monthly decline in four years (-6.5%), finishing at US$1,743/oz. From a performance perspective, this is an unusual start to the year. Over the past two decades, January/February has typically been the strongest two-month period during the year.2  There is similar seasonality in gold ETF flows; they generally see their strongest inflows during the first quarter of the year.3 

Trading volumes for gold fell 12% during February to US$166bn per day, below the 2020 average of US$183bn. This was driven primarily by a 30% decrease in COMEX futures trading. Net long positioning, via the recent Commitment of Traders (COT) report for gold COMEX futures, fell to 675t, below the 2020 average net long level of 871t and the lowest level since June 2019. 4

Rates are impacting gold prices….

Over the past year or so, we have highlighted that lower interest rates resulted in a reduction in the opportunity cost of holding gold. Conversely, as rates move higher, the yields on bonds become more attractive creating a headwind for the price of gold. This has been the case in recent months as discussed in a recent blog, gold is moving with rates. Our short-term gold performance model validates this perspective. Gold’s sensitivity to interest rates has increased by more than four-fold during the past year, and the movement in interest rates alone explains up to 40% of gold’s performance over the same period.  

However, despite their significant relative increase, the overall level of nominal interest rates remains historically low and real rates across developed markets remain negative. Our analysis shows that gold can still perform well when interest rates are below 2% in real terms, well below their current level.5  
 

…But inflation expectations and ‘reflation’ positioning are coming to the forefront

While higher nominal rates could create headwinds for gold, higher inflation may partly offset their effect. As COVID-19 vaccines roll out and monetary and fiscal stimulus continues, we believe the continued rise in risk assets is partly driven by an expectation from investors that central banks and governments will continue to support global markets. As risk assets continue to climb, it is likely that investors are moving away from hedges and diversifiers such as bonds and gold in search of assets that may benefit from a higher correlation to equity markets.

However, inflation expectations appear to be rising and a commodity-led ‘reflation’ appears to have begun. Broad-based commodities have shown strength, which often occurs as markets enter inflationary periods. On the year, oil is up by more than 25% and copper up 17%. Lumber prices have more than doubled in the past four months, suggesting investors are anticipating a ‘reflation’ of assets. Inflation measures like the Consumer Price Index are expected to climb meaningfully in the coming months. Part of this is a function of oil prices increasing so strongly from last year’s levels, but also other metrics are flashing signs of inflation. Recently, the Treasury/TIPS breakeven levels, a metric that measures the difference between bonds and inflation-linked bonds, reached 2.4%, a level last seen 10 years ago.6

Gold has so far lagged the commodities rally. However, this is not uncommon. Historically, gold has tended to underperform a commodity-led reflationary period in the first six months but has generally outperformed in the subsequent six to 36 months. This is because commodities are more closely linked to consumer baskets and, as they rise, feed inflation higher. Once expectations increase, investors often look for hedges to protect against the potential higher inflation which has historically benefited gold.

Monetary policy is poised to remain accommodative  

Central bankers across the globe continue to suggest they will do what is needed to support the economy and keep policy rates low for the foreseeable future. On Monday, Australia doubled its bond purchases to spur the recent rise in yields, and focus remains on the European Central Bank, who has said would avoid any undue rise in yields. The Reserve Bank of India recently decided to continue the accommodative stance ‘as long as necessary’. US Federal Reserve Chairman, Jerome Powell, has indicated that interest rates in the US would be kept low to provide continued support for an economic recovery even as inflation ticks higher and the economy improves. 

Regional flows7

Momentum trading impacted larger funds in North America

  • North American funds had outflows of 71.2t (-US$4.1bn, -3.4% AUM)
  • Holdings in European funds fell by 23.8t (-US$1.1bn, -1.1%)
  • Funds listed in Asia had strong net inflows of 10.6t (US$596mn, +8.4%)
  • Other regions had outflows of 0.3t (-US$27.0mn, -0.7%).

Individual flows

SPDR® Gold Shares (US) represented the lion’s share of global outflows

  • In North America, SPDR® Gold Shares lost 66.6t (-US$3.8bn, -5.5%), followed by iShares Gold Trust, which lost 7.2t (-US$406mn, -1.3%). SPDR® Gold MiniShares had holdings rise by 2.3t (US$138mn, 3.3%) while Graniteshares Gold Trust added 0.4t (US$22mn, 2.0%)
  • In Europe, three UK-listed funds led outflows. Invesco Physical Gold lost 8.6t (-US$498mn, -3.5%), iShares Physical Gold lost 5.2t (-US$290mn, -2.0%), and Gold Bullion Securities lost 2.7t (-US$157mn, -3.5%)
  • In Asia, Huaan Yifu led global inflows of 4.8t (US%278mn, 18%), while Bosera Gold added 2.2t (US$128mn, 11%). Nippon India ETF grew holdings by 4.2%.

Long-term trends

Global AUM has retraced the last six months of overall inflows over the past four months

  • Month-to-month swings in overall global flows continue to be dominated by US and UK funds 
  • While larger gold ETFs have lost assets in recent months, likely from momentum trading, low-cost gold-backed ETFs continue to see assets grow8
  • Asian gold ETFs holdings continue to grow assets despite other regions faltering.

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. This was calculated as the average two-month period returns for gold from 1/1/2001 to 31/12/2020, for the full calendar month periods. For example, the January/February return numbers represented the average returns from 1 January to 28 February for each of the 20 years, or observations.

  3. Based on the average percentage change in holdings in gold ETFs for each quarter from 1/2/2006 to 28/2/2021.

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

  5. As of 1 March 2021, US 10-year yields are trading at -0.76% in real terms. 

  6. Based on the difference between five-year treasuries and TIPS

  7. 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.

  8. 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 Goldman Sachs Physical Gold ETF.

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