ETF Monthly commentary

Gold-backed ETF holdings grew 14% in 2019, reaching all-time highs

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2019 Highlights

Updated 29 January 2019

Global gold-backed ETFs and similar products had US$19.2bn, or 400 tonnes(t), of net inflows in 2019 in almost all countries, after holdings rebounded in December. Collective ETF holdings reached all-time highs of ~2,900t in the fourth quarter. Overall, global gold-backed assets under management (AUM) grew 37% in US dollars during the year as a result of positive demand combined with an 18.4% increase in the gold price. 

 

ETF flows 1

ETF flows chart

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

Regional overview

North American funds led regional inflows in 2019, adding 206t (US$10.1bn, 14.4% AUM) as market uncertainty increased on the back of growing geopolitical tensions and the Federal reserve cut rates for the first time in ten years. European funds had inflows of 188t (US$8.8bn, 13.6%) driven primarily by UK-based funds, which added 91t (US$4.1bn, 14.5%) as Brexit concerns loomed large throughout the year. Asian funds finished the year relatively flat, losing 0.1t (US$12mn, 0.3%). Funds in other regions grew 17.5%, adding 7.6t and US$370mn, with most of the growth coming from Australian-listed funds.

Price performance

Gold reached or was near all-time highs in every major G10 currency apart from the US dollar and Swiss franc. And gold’s US dollar price performance during 2019 (+18.4%, $1,515/oz) tracked three distinct timelines: 

  1. it remained relatively flat, near $1,300/oz, throughout May as the dollar strengthened and geopolitical concerns had yet to come to the forefront
  2. it rallied strongly between early June and early September, reaching a multi-year high of US$1,546/oz, as the Fed shifted to cutting rates for the first time since the financial crisis and US/China trade tensions and Brexit concerns increased
  3. it gave back some of its gains ($1,450/oz) in the early part of the fourth quarter as geopolitical resolutions (Brexit, US/China) were extended into 2020, while risky assets continued to “melt higher.” However, gold finished the year 4% higher in December, near the y-t-d highs, as investors positioned ahead of 2020.

Demand

Ultimately, gold-backed ETF inflows alongside central bank purchases were a large driver of global gold demand in 2019. Increased investor activity in the gold market was also evident through trading volumes and positioning in derivatives markets. Global trading volumes rose 27% y-o-y to US$145bn per day in 2019, up from US$114bn per day in 2018. Gold futures market positioning closed the year on a positive note as COMEX net longs4 remained near all-time highs, well above long-term averages. And bullish sentiment was reflected in the gold options market with large call options purchases, where investors paid an all-time premium for upside calls compared to downside puts.

2019 drivers continue into 2020

Even though most global equity indices finished the year at or near all-time highs, gold shone, having its strongest price increase in ten years. The strength of gold was mainly the by-product of a dovish shift in monetary policy. Our research indicates that a shift from a hawkish or neutral stance to a dovish one has historically led gold to outperform – The impact of monetary policy on gold. Additionally, investors may have been drawn to our research that shows 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. And with over 90% of sovereign debt trading with negative real rates, the opportunity cost of investing in gold improved.

While expectations for future US Federal Reserve interest rate cuts have fallen, continued Fed intervention in the repo market has led some to consider this a form of quantitative easing through liquidity injection. As discussed in our recent blog Key trends to watch as we conclude 2019, gold price performance is likely to be impacted by uncertainty around monetary policy direction.

Yet many of 2019’s drivers of gold performance remain. While a “lite version” of a US/China trade deal was agreed in principle, it has yet to be formally signed, and terms have yet to be disclosed. Continued discussion of more contentious policies, like intellectual property and currency manipulation, are likely to come to the forefront. And while PM Boris Johnson has secured a commanding majority in the UK parliament, the impact of the 2020 Brexit has yet to be realised.

Finally, multiple expansion in the global stock markets, as well as surprisingly low yields in speculative corporate debt, continue to worry investors. A willingness to add risk, as stock market sentiment remains at extremely bullish levels, is evidenced by VIX futures levels near all-time short levels. At times, historically, significant VIX short positioning has preceded sharp stock market sell-offs and subsequent rallies in the price of gold.

Regional flows1

North American and European funds drove almost all inflows each growing 14% in 2019

  • North American funds had inflows of 206t (US$10.1bn, 14.4% AUM)
  • Holdings in European funds increased by 188t (US$8.8bn, 13.6%) 
  • Funds listed in Asia were nearly flat losing 0.1t (US$12mn, 0.3%)
  • Other regions had inflows of 7.6t (US$370mn, 17.5%).

Individual flows2

SPDR® Gold Shares and iShares Gold Trust collectively represented nearly half the global inflows 

  • In North America, SPDR® Gold Shares led global inflows (106t, US$5.3bn, 16.3%), followed by iShares Gold Trust (+80t, US$3.8bn, 33.0%) and SPDR® Gold Mini Shares (+13.5t, US$602mn, 151.7%)
  • Three UK-based funds led European inflows as iShares Physical added 38t (US$ 1.8bn, 40.5%), WisdomTree Physical Swiss Gold added 37t (US$1.6bn, 218.5%) and Invesco Physical added 25.9t (US$1.1bn, 22.7%). WisdomTree Physical Gold had the only meaningful outflows in Europe, losing 15t (US$650mn, 9.8%), which could have been a shift to similar funds in the region with lower expense ratios.
  • Bosera Gold’s listed fund in China led Asian inflows, adding 4.4t (US$225mn, 59.4%), while Huaan Yifu, in China, lost 5.8t (US$208mn, 19.3%)
  • Australia’s ETFS Metal Securities most of the ‘Other region’ inflows adding 4.2t (US$214mn, 56.7%). 

Long-term trends

Gold-backed ETFs grew 14% in 2019, reaching all-time highs in holdings

  • Global gold-backed ETFs added 400t (US$19.2bn, 13.6%) in 2019, driven by strong inflows in the second half of the year
  • UK- and German-based funds grew 15% and 13% during the year, a by-product of Brexit concerns and negative yields in Germany.
  • North America added 206t compared to 188t in Europe in 2019 
  • Low-cost gold-backed ETFs in the US have seen positive flows for 18 of the past 19 months and increased their collective holdings by 60%.3

December Highlights

Following November outflows, gold-backed ETF holdings bounced back in December as funds added 14t (US$491mn, 0.4%), driven almost entirely by Europe: European funds added US$672mn, split between funds in France, Germany and Switzerland. Flows in North American and Other regions were mostly flat, while Asian funds gave up 5.1% of assets. This came as the US$ gold price rebounded nearly 4% during the month to close the year at US$1,515/oz.

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. The recent review yielded a Swiss-based ETC UBS ETF Gold, which was not on the prior list. This fund has been added and historical data on it has been updated; this yielded an increase of 44.9 tonnes of total global holdings.

  2. 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.

  3. 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.

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

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