Gold-backed ETF demand remained strong despite stock market all-time highs1
In October global gold-backed ETFs and similar products saw US$1.9bn of net inflows, primarily across Europe and North America, increasing their collective gold holdings by 44.4 tonnes(t) to a new record high of 2,900t. Global gold-backed assets under management (AUM) have grown 38% this year, partially driven by the gold price appreciation; this figure is 10% below their historical record in 2012 when the price of gold was above US$1,700/oz.
European funds led October’s global flows, adding 31.3t (US$1.2bn, 1.9% of AUM), or 67% of net inflows. Two-thirds of European gold-backed ETF inflows came from UK-listed funds as inflows persisted ahead of the 31 October Brexit deadline. North American funds added 13.2t (US$585mn, 0.8%) to their holdings, potentially as a result of the weaker US dollar (-2% during the month) and the pending uncertainty around the October Federal Reserve meeting and US / China relations. Flows were minimal in Asia and Other regions.
Gold rebounded above US$1,500/oz (XAU: US$1,512/oz), increasing 2.9% on the month, bringing the total return of gold to 18% y-t-d, near all-time highs in every major G10 currency except for the US dollar and Swiss franc. The gold-price rally in October appeared to be a by-product of combined factors: the weaker US dollar, geopolitical uncertainty surrounding the preliminary US/China trade deal and the uncertainty of Brexit. The latter is most notable as there were US$804mn of inflows in UK-based funds during the month, representing nearly half of all global inflows.
COMEX net longs† fell meaningfully from all-time highs early in the month but rallied to 941t as October came to a close, levels well above long-term averages. Both implied and realised volatility fell sharply in October as the gold price gravitated around the US$1,500/oz level. The 30-day realised volatility fell from 16 to 11.8, while the 30-day implied volatility fell from 14.9 to 11.1. Both levels are around the median for the past year. Although the volatility skew in the options market has fallen from an all-time high it remains elevated. The skew, computed as the difference in premia paid between puts and calls at equivalent strikes, implies that market participants have been willing to pay a significant premium for exposure to a higher gold price versus protection against a lower price, suggesting bullish sentiment; the decrease in skew is a function of implied call volatility falling more than implied put volatility.
Global trading volumes fell from US$189bn per day in September to US$156bn per day in October, which is slightly above the y-t-d average but 37% above the 2018 daily average. Most of this decrease was due to a 25% drop in global futures volumes, primarily on the COMEX and Shanghai Futures Exchanges, both of which have seen sharp increases over recent months.
While the US Federal Reserve cut interest rates by 25bp, as expected, they suggested there will be no further changes at the final meeting of the year. As a result, the probability of a December cut fell from nearly 50% to 10% during the last few days of the month. There is some uncertainty surrounding Q1 2020 Fed expectations, with a 50% probability of at least one cut over the first two meetings next year. As discussed in our Mid-year gold outlook 2019, this highlights the point that gold price performance is likely to be impacted by uncertainty around monetary policy direction.
For the most part, the risk-on environment during October was due to pushing potentially market-volatile decisions out to future months. Specifically, the Brexit deadline has been pushed back to January, and while the US and China agreed, in principle, to a preliminary deal, it has yet to be signed. This drove the US stock markets to all-time highs.
Yet institutional investor sentiment continues to wane in the face of incredibly lofty stock-market valuations. Q3 company earnings have been mixed so far; over 80% of sovereign debt is trading with negative real rates, improving the opportunity cost of investing in gold. We have researched the positive impact of lower rates on gold prices as well as the potential for additional gold exposure (potentially replacing bonds) in a low-rate environment.
There remain potential positive gold price catalysts for the final two months of the year. In the US, Congress continues to push forward with potential impeachment proceedings, while the US/China agreement has yet to be signed. And it seems improbable that EU leaders will grant a further extension to Brexit if the January deadline is not met, all of which signposts towards much more uncertainty as 2020 unfolds.
UK funds drove inflows in October
- Holdings in European funds rose by 31.3t (US$1.2bn, 1.9%)
- North American funds had inflows of 13.2t (US$585mn, 0.8% AUM)
- Funds listed in Asia decreased by 0.8t (US$0.9mn, 0.02%)
- Other regions had inflows of 0.7t (US$33mn, 1.9%).
iShares Gold Trust led individual fund global inflows, adding $702mn in October
- European inflows were led by ETFS Physical 6.7t (US$322mn, 4.3%), Invesco Physical 3.9t (US$191mn, 2.7%) and iShares Physical Gold 3.2t (US$139mn, 2.1%), all of which are listed in the UK
- In North America, iShares Gold Trust (+14.5t, US$702mn, 4.3%), Aberdeen Physical Swiss Gold (+1.9t, US$94mn, 8.8%), and SPDR® Gold Mini Shares (+0.9t, US$45mn, 4.3%) drove the bulk, while SPDR® Gold Shares led global outflows (-5.3t, US$238mn, 0.5%)
- There were no noteworthy flow movements in Asia or Other region individual funds.
Long term trends
Global gold-backed ETF holdings hit record highs, increasing by 14.4% to date this year
- Global gold-backed ETFs added 421t (US$20.2bn, 14.4%) y-t-d, driven by strong inflows in the past five months
- European funds have grown consistently this year, seeing positive flows in all months except April and UK-based fund holdings continue to make all-time highs, reaching 600t or 21% of global gold-backed ETF assets in October
- Strong inflows in North American-listed funds over the past five months have increased the region’s contribution to 2019 growth – as of end October, North America added 229t compared to 185t in Europe, or 54% of net inflows in 2019
- Low-cost gold-backed ETFs‡ in the US have seen positive flows for 16 of the past 17 months and have increased their collective holdings by 55% so far this year.
1We regularly review the global gold-backed ETF universe and adjust the list of funds and holdings based on newly available data and information. The recent review yielded a Swiss-based ETC UBS ETF Gold, which was not on the prior list. The fund has been added and historical data on the fund has been updated which yielded an increase of 44.9 tonnes of total global holdings
* Note: 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.
‡ Low-cost US-based 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.
† Net longs represent Money Manager and Other Net long positioning in the COMEX futures market.