ETF Monthly commentary

Gold-backed ETFs holdings hit record highs in September

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September highlights

In September, global gold-backed ETFs and similar products had US$4.1bn of net inflows across all regions, increasing their collective gold holdings by 78.6t to 2,855 tonnes(t), the highest levels of all time. Holdings surpassed late 2012 levels, at which time the gold price was near US$1,700/oz, 18% higher than current levels. Notably, the gold-backed ETF landscape is vastly different than in 2012 when two-thirds of global holdings were concentrated in North America. Today, North American- and European-listed funds make up 52% and 44% of global holdings respectively, with the remainder coming from funds listed in Asia and other regions.  

 

ETF flows 1

ETF monthly flows

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

North American funds led September’s global flows, adding 64.4t (US$3.2bn, 4.6% of AUM), or 78% of net inflows. Low-cost gold-backed ETFs‡ continued to grow, accumulating 2.9t during the month and bringing their collective holdings to 61t, worth US$2.9bn. European-listed funds brought in 8.8t (US$629mn, 1.0%), mainly in the UK, as investors positioned for an impeding 31 October Brexit decision. Funds in Asia had another month of strong inflows at 4.2t ($184mn, 4.6%), driven by Chinese funds.

The gold-price rally paused as global rates increased and the US dollar strengthened, falling by 3% (in US dollars) in September after having increased by 20% during the previous four months. Yet global demand for gold-backed ETFs remained strong, especially since gold remained near all-time highs in every major G10 currency, except the US dollar and Swiss franc. Positive sentiment towards gold was also reflected in COMEX net longs 4, which reached all-time highs equivalent to 1,134t during the month. The volatility skew in the options market was at an all-time high, measured against available data from 2007 onwards. The skew, computed as the difference in premia paid between puts and calls at equivalent strikes, implies that market participants were willing to pay a significant premium for exposure to a higher gold price versus protection against a lower price, suggesting bullish sentiment. Global trading volumes remained high across markets, finishing the month at US$183bn a day, but fell 10% from August levels. Volumes on the Shanghai Futures Exchange (SFE) remained elevated, at US$20bn a day, well above the 2019 y-t-d average of US$9bn and the full year 2018 average of US$3bn.

During the month, global monetary policy continued to influence gold price performance as many central banks around the world cut rates or expanded quantitative easing measures. The Federal Reserve (Fed) cut rates by 25bps in September – a move that was widely expected – but signalled at most only one further likely cut this year. By the end of September, Fed fund futures indicated less than a 50% implied probability of a cut in October, and a 73% chance of a single cut by the end of the year. Back at the beginning of September the market had been pricing two cuts by year end. 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. 

There are, however, several potential positive catalysts for gold in October. First, global uncertainty continues. The US House of Representatives initiated a preliminary inquiry as to whether to proceed with a formal impeachment investigation of President Trump; a move that could negatively impact risky assets and drive China to potentially delay trade solutions until the 2020 Presidential election. In addition, the deadline for a Brexit decision falls at the end of October, and there is still uncertainty as to whether there will be a ‘No Deal Brexit’ or a deadline extension. Second, despite the increases during September, interest rates worldwide remain low; we estimate that over 80% of sovereign debt is trading with negative real rates, lowering the opportunity cost of investing in gold. Finally, the US stock market is trading near all-time highs and, historically, October is a month when some of the sharpest historical down-moves in stock performance are seen; the most recent of which was last year when the S&P 500 fell 7% during the month. On the flip side, continued dollar strength and a deceleration in gold consumer demand in India and China could create headwinds. 

Regional flows 2

North American funds added 4.6% to their holdings in September

  • North American funds had inflows of 64t (US$3.2bn, 4.6% AUM)
  • Holdings in European funds rose by 8.6t (US$629mn, 1.0%)
  • Funds listed in Asia increased by 4.2t (US$184mn, 4.6%)
  • Other regions had inflows of 1.5t (US$71mn, 4.3%).

Individual flows

SPDR® Gold Shares and iShares Gold Trust had combined inflows of US$2.9bn  

  • In North America, SSPDR® Gold Shares (+42.5t, US$2.1bn, 4.9%), iShares Gold Trust (+16.2t, US$789mn, 4.9%), and SPDR® Gold Mini Shares (+2.5t, US$122mn, 13%) drove the bulk of inflows
  • European inflows were led by Xtrackers Physical Euro Hedged which added 3.5t (US$193mn, 8.7%), and ETFS Physical added 3.6t (US$176mn, 7.8%)
  • Flows in China were led by Bosera’s listed fund which added 2.2t (US$109mn, 18%). 

Long term trends

Global gold-backed ETF holdings hit record highs, increasing by 13.5% to date this year

  • Global gold-backed ETFs added 378t (US$18.4bn, 13.5%) y-t-d, driven by strong inflows in the past four months
  • European funds have grown consistently this year, seeing positive flows in all months except April and UK-based fund holdings are at all-time highs, reaching 582 or 21% of global gold-backed ETF assets in September
  • Strong inflows in North American-listed funds over the past five months have increased the region’s contribution to 2019 growth – as of end September, North America had added 217t compared to 154t in Europe, or 57% of net inflows in 2019
  • Low-cost gold-backed ETFs3 in the US have seen positive flows for 15 of the past 16 months and have increased their collective holdings by 51% so far this year
  • Asian-listed funds have reversed strong early-year outflows of over 12% and now have grown 8% on the year.

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. 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

  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 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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