ETF Monthly commentary

Gold-backed ETFs lost 1% of holdings in November following five months of strong inflows

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In November, global gold-backed ETFs and similar products saw US$1.3bn of net outflows across North America, Europe and Asia, decreasing their collective gold holdings by 30.1 tonnes(t) after reaching record highs in October. Global gold-backed assets under management (AUM) have grown 35% this year as a result of increased investment demand and price appreciation.

 

ETF flows 1

ETF monthly flows

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

In November, global gold-backed ETFs and similar products saw US$1.3bn of net outflows across North America, Europe and Asia, decreasing their collective gold holdings by 30.1 tonnes(t) after reaching record highs in October. Global gold-backed assets under management (AUM) have grown 35% this year as a result of increased investment demand and price appreciation.

In November, North American funds led regional outflows, losing 17.3t (US$731mn, 1.1% AUM), as the US dollar strengthened and stock markets reached all-time highs on the strongest monthly performance since June. European fund outflows (US$538mn, 0.9%) were driven primarily by UK-based funds, which lost 18.8t (US$871mn, 3.2%) as the Brexit deadline extension prompted a reversal in the protective inflows of October. Asian funds lost 2.1t (US$119mn, 3.1%), a result of outflows in China. Funds in Other regions grew 7.6% with a sharp increase in the holdings of a South African gold-backed ETF.

Although gold fell below US$1,500/oz (LBMA: US$1,460/oz) – decreasing 3.4% on the month and bringing the total return of gold to 14% y-t-d – it remains near all-time highs in every major G10 currency apart from the US dollar and Swiss franc. The risk-on environment, coupled with higher rates and easing geopolitical tensions, were headwinds for the price of gold. Yet, gold-backed inflows in 2019 remain a large driver of gold demand this year.

Global trading volumes rose to US$170bn per day in November, from US$156bn per day in October, which is 49% above the 2018 daily average. COMEX volumes rose to y-t-d highs of US$67bn a day as futures options volumes increased. There were large notable long-dated call purchases in gold options, demonstrating a bullish attitude. Many of the larger trades were significantly out-of-the-money and will require large moves in the price of gold if profitability is to be achieved on expiration. However, many of these trades are likely volatility-related, with investors betting on increased future gold price volatility. 

Expectations for future US Federal Reserve interest rate cuts continued to fall in November and this too weighed on gold price sentiment. There is some uncertainty surrounding 2020 Fed expectations, with current probabilities of only one rate cut next year, and that is not expected until at least the second quarter. As discussed in our Mid-year gold outlook 2019, gold price performance is likely to be impacted by uncertainty around monetary policy direction.

Risky assets continued to “melt up” in November as perceived market impacting events like the US/China trade deal and Brexit have been pushed out into 2020. The lack of market risk concerns is highlighted by VIX future positioning, which is at all-time short levels, a sign of extreme bullish market sentiment. At times, historically, significant short positioning has preceded sharp stock market sell-offs and subsequent rallies in the price of gold.

Despite the pullback in the price of gold, market positioning remains positive as COMEX net longs 3 remain near all-time highs, well above long-term averages. And with over 70% of sovereign debt trading with negative real rates, the opportunity cost of investing in gold has improved. 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.

Regional flows 1

UK funds retraced October inflows losing US$871mn in November

  • North American funds had outflows of 17.3t (US$731mn, 1.1% AUM)
  • Holdings in European funds fell by 13.6t (US$538mn, 0.9%)
  • Funds listed in Asia decreased by 2.1t (US$119mn, 3.1%)
  • Other regions had inflows of 2.9t (US$138mn, 7.6%)..

Individual flows

SPDR® Gold Shares lost assets for a second straight month (US$925mn) but have added US$5.4bn or 17% of assets this year 

  • In North America, iShares Gold Trust (+1.6t, US$78mn, 0.5%) and SPDR® Gold Mini Shares (+0.9t, US$45mn, 4.0%) drove the bulk of inflows while SPDR® Gold Shares led global outflows (-19.9t, US$925mn, 2.1%).
  • European inflows were led by Amundi Physical 3.8t (US$182mn, 27%), ETFS Physical Swiss 3.1t (US$147mn, 5.9%) and Xetra 2.7t (US$102mn, 1.1%). ETF Physical lost 7% of its assets or US$528mn and iShares Physical lost 5% or US$317mn. Both funds are based in the UK.
  • Huaan Yifu, in China, lost US$75mn or 6% of its assets, while 1nvest Gold in South Africa added nearly 2t, growing its fund by over 8 times in one month.

Long term trends

Global gold-backed ETF holdings hit record highs in October, and have increased by 13.9% to date this year

  • Global gold-backed ETFs have added 385t (US$18.6bn, 13.9%) y-t-d, driven by strong inflows in the five months prior to November
  • UK- and German-based funds have grown 15% and 12% respectively this year, a by-product of Brexit concerns and negative yields in Germany.
  • North America added 206t compared to 171t in Europe this year, or 54% of net inflows in 2019. 
  • Low-cost gold-backed ETFs2 in the US have seen positive flows for 17 of the past 18 months and have increased their collective holdings by 58% so far this year. 

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. 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.

  2. 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.

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

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