ETF Monthly commentary

Global gold-backed ETF holdings fell 2% in April, resulting in net 2019 outflows to date

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In April, holdings in global gold-backed ETFs and similar products fell across all regions by 57 tonnes(t) to 2,424t, equivalent to US$2.2bn in outflows. Global assets under management (AUM) in US dollars fell by 3% to US$100bn, as the price of gold of gold fell 1% during the month. Global gold-backed ETFs have now lost assets of US$377mn, 0.4% AUM on the year, reversing January’s strong start.

 

ETF monthly flows

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

North America led outflows in both absolute and percentage terms, losing 46t (US$1.9bn, 3.7% AUM); a loss driven primarily by the most liquid gold-backed ETFs. This was also the first month in over a year that low-cost gold backed ETFs in the US had net outflows.2 This negative trend has been influenced by bullish sentiment as the US stock market continued to reach new highs, implied volatility fell to pre-October 2018 levels, and the US dollar strengthened to a two-year high.

Europe gave up early-month inflows and lost 8t (US$257mn), with most of these outflows coming from the UK (after holdings reached all-time highs in February). The Brexit minimum six month delay improved investor sentiment and strengthened the pound, creating a shift in the positive trend seen in earlier months.

Asia lost 4% of assets, mainly from Chinese funds where local investors appear to be shifting assets away from gold, taking profits in local terms and moving money into local stock markets, which rallied over 25% during the first quarter.

Gold trading volumes in April decreased to US$106mn per day, 7% below the 2018 average. Net long positioning in COMEX futures fell after a few months of gains and now sit below historical averages, providing further evidence of the recent bearish gold market sentiment and coinciding with net outflows in ETFs. Open interest in COMEX futures options has fallen considerably – another example of a recent drop in liquidity. Additionally, implied volatility in the gold options space has fallen to a near one-year low despite the increase in realised volatility, suggesting the market does not foresee meaningfully higher realised volatility in gold prices in the near future.

While investor sentiment on the global economic outlook has improved, signs of potential risks remain. Stock valuations are stretched, there is political uncertainty in Europe, and US/China trade-relations remain unresolved; all factors that have the potential to create volatility in the markets. Our research indicates that gold becomes much more inversely correlated with the stock market when the stock market has multiple standard deviation moves to the downside – equivalent to spikes in the VIX.

In addition, the market continues to adjust to a shift in Federal Reserve policy from tightening to neutral and react to its most recent comment on the ‘transitory’ nature of its future decisions. And the bond market is currently pricing a ~50% chance of a cut by the end of the year; prior to the ‘transitory’ comment it had been as high as 70% during the month. Many global central banks have taken cues from Fed policy, indicating that rates are unlikely to increase by much. We believe this shift will remain supportive of gold as highlighted in our recent report The impact of monetary policy on gold, which finds that, historically, a change in the Fed’s policy from tightening to neutral results in a meaningful rise in US$ gold prices over the subsequent 12 months.

Looking forward, we believe that expectations of financial market uncertainty, shifts in monetary policy and structural economic reforms in major gold markets will influence gold’s performance in 2019 (see our 2019 Outlook).

Regional flows1

North American funds led global outflows losing 4% in April

  • North American funds saw outflows of 46t (US$1.9bn, 3.7% AUM)1
  • Holdings in European funds fell by 8t (US$257mn, 0.6%)
  • Funds listed in Asia decreased by 2.5t (US$114mn, 4%)
  • Other regions saw outflows of 0.4t (US$16mn, 1.3%)

Individual flows

  • In North America, SPDR® Gold Shares lost 38t (US$1.6bn, 5%) and iShares Gold Trust lost 6t (US$252mn, 2%), the lion's share of the region's outflows
  • iShares Physical Gold and ETFS Physical Gold in the UK each lost ~6t, collectively losing around US$500mn
  • Invesco Physical Gold was a bright spot in Europe, adding 8t (US$337mn, 7%) over the month. This fund has the largest growth in Europe this year, having added 12t (US$520mn, 11%)
  • Bosera's listed fund was the only one in Asia to have inflows 3t (US$115mn, 32%), which is likely the effect of the continued unwind of its unlisted funds. Huaan Yifu, Asia's largest fund, lost 5t (US$228mn, 24%), making a total loss of 33% this year.

Long-term trends

ETF holdings have fallen 0.4% in 2019

  • Global gold-backed ETF flows are negative on the year as the price of gold during 2019 is now effectively flat in US dollars
  • Total holdings have been heavily gold- and dollar-price driven as of late, but long-term strategic holders continue to add to low-cost gold-backed ETFs
  • Holdings in Chinese funds have put a damper on total Asian holdings with assets in the region falling 10% on the year
  • Despite outflows in April, holdings in UK-based gold-backed ETFs remain near all-time highs, likely due to Brexit uncertainty driving heavy inflows over the past few quarters

Footnotes

  1. 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. This month, 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 of the dollar and the timing of the flows. For example, Europe experienced outflows early in the month when the price of gold was low but gained assets later in month when the price of gold increased.

  2. Low-cost US-based gold backed ETFs are defined as gold-backed ETFs that trade on US markets with annual management fees of 20bps or less.

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