ETF Monthly commentary

Inflows into gold ETFs for a sixth straight month in April

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April highlights

Globally, gold-backed ETFs (gold ETFs) added 170 tonnes(t) – net inflows of US$9.3bn (+5.1%) – in April, boosting holdings to a new all-time high of 3,355t.1 Assets under management (AUM) also reached a new record high of US$184bn as gold in US dollars moved higher by 5.8%. Inflows have been strong and consistent in recent months, but not unprecedented. Rolling twelve-month inflows of 879t just surpassed those of 2009 and 2016, while rolling six-month inflows are less than two-thirds of the 457t of inflows in the comparable time periods of 2009 and 2016.

 

ETF flows 1

ETF flows chart

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

Regional overview

Uncertainty surrounding the economic and social impact of COVID-19, along with significant central bank intervention, continued to drive inflows into gold. Gold ETFs listed in all regions experienced inflows during the month, with inflows being particularly strong in North America, where flows have often been more correlated with gold’s price behaviour.

North American funds added 144t (US$7.8bn, 8.3% AUM), while European funds added 20t (US$1.1bn, 1.4%). Asian funds – primarily in China – also finished the month with relatively strong inflows, adding 2.9t (US$206mn, 3.9%), and funds in other regions grew 5.8%, adding 3.3t and US$172mn.

Price performance

Gold in US dollars finished the month above US$1,700/oz – a monthly closing level not seen since 2012. While gold is still 10% below all-time highs in US dollars, it continued to make all-time highs in every other major currency, namely: Australian and Canadian dollars, euro, pounds, yen and yuan, and briefly made a new high in Swiss francs during the month.

Gold global trading volumes, like those from many other major asset classes, fell sharply in April to US$140bn a day, down from US$236bn a day in March, but this is roughly in line with the 2019 daily average of US$145bn. COMEX net longs4 as noted in the Commitment of Traders (COT) report, increased slightly in April, after falling sharply in March from the all-time high of 1,209t (US$63bn) achieved during February. While gold volatility decreased from the extreme levels in March, it remained elevated and the implied volatility – or how much investors expected gold would move over the coming months – remained high as well.

At the time of publication, gold has outperformed most major asset classes this year, up by more than 11% in US dollar terms. And while bond and stock prices also rallied in April, supported by a very accommodative global monetary policy stance, investors are likely to face more volatility, especially since indices like the S&P 500 experienced their strongest monthly performance since 1987

The recent market volatility and price behaviour of broad-based global assets provided an opportunity to highlight gold’s effectiveness as a hedge. In late April, we published a new report, Investment Update: Gold, an efficient hedge, in which we compared portfolios that included an allocation to gold to portfolios with various other commonly used hedges. This analysis addressed the finding from our March update, Investment Update: Gold prices swing as markets sell off, that sharp stock market sell-offs often require investors to meet capital requirements, and they can do so by selling a liquid asset like gold.

Our recent analysis suggests that many hedges are not initially effective in tail events. We found that volatility-related hedges are by far the most effective initially but can be costly and erode overall portfolio performance over the long run. Stacked against all the hedges we analysed – when comparing metrics like returns, volatility, risk-adjusted returns, and portfolio drawdown protection – gold stood out favourably.

Looking forward

As noted in our March Gold ETF flows report, the price strength of gold has, so far, mirrored that of the Global Financial Crisis. At that time it rallied back following the initial Quantitative Easing (QE) program in the US, which, along with similar monetary policy interventions worldwide, propelled gold over 130% higher at its peak in September 2011.

A vast majority of central banks, including the US Federal Reserve, continue to note their willingness to utilise well-established – and new – ‘tools’ to support the economy. While this comes at a time when COVID-19 cases are diminishing and related actions – such as fast-tracked treatments and antibody tests – may help to create a path towards ‘normalisation’, the long-term effects of the pandemic on the economy and any future societal shifts are yet to be determined. Just last week, the US published annually adjusted GDP losses of 4.8% in the first three months of 2020, the biggest quarterly decline since the fourth quarter of 2008. Europe, as a whole, was worse – the region shrank 14.4% on an annualised basis during the first quarter, the lowest quarterly number ever. It is this uncertainty, along with the unknown ability of central banks to support the markets, that could continue to drive investment demand for gold.

Although gold demand in jewellery and technology has been negatively impacted by the economic deceleration, as we noted in our Gold Demand Trends Q1 2020 report, history suggests that the likely strength of investment demand may offset this weakness. In conclusion, we expect central banks to remain net buyers of gold in 2020, albeit at a lower level.

Regional flows2

North America drove the bulk of global gold ETF inflows in April

  • North American funds had inflows of 144t (US$7.8bn, 8.3% AUM)
  • Holdings in European funds increased by 20t (US$1.1bn, 1.4%)
  • Funds listed in Asia added 2.9t (US$206mn, 3.9%)
  • Other regions had inflows of 3.3t (US$172mn, 5.8%).

Individual flows

SPDR® Gold Shares and iShares Gold Trust represented 71% of all global inflows in April

  • In North America, SPDR® Gold Shares led global inflows, adding 89.5t (US$4.9bn, 9.7%), while iShares Gold Trust added 31.2t (US$1.7bn, 8.5%). SPDR® Gold MiniShares led low-cost3 inflows, growing 21% or US$334mn, and Aberdeen Standard Physical Gold Shares grew 17%, adding US$245mn
  • Two UK-based funds led European-fund inflows: Invesco Physical Gold added 13.9t (US$749mn, 7.8%), and iShares Physical added 7.2t (US$420mn, 4.2%). Switzerland was the only country with net outflows during the month as UBS ETF Gold lost 15.3t (US$855mn, 37%) and Pictet CH Physical lost 4.2t (US$235mn, 81%)
  • In China, Huaan Yifu added 3.2t (US$186mn, 15%), while Bosera lost 1.8t (US$89mn, 11%).

Long-term trends

Gold ETF assets have grown 80% in the past year

  • Assets in global gold-backed ETFs grew during 11 of the past 12 months adding 80% to total AUM>
  • Following the April inflows, both holdings and assets of gold-backed ETFs continue to make all-time highs
  • UK-based gold funds continue to take regional and global market share, now representing 47% of European assets and 21% of global assets
  • Low-cost gold-backed ETFs in the US have seen positive flows for 22 of the past 23 months and have increased their collective assets to 91t, which amounts to roughly the holdings of all Asian-based funds3

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.

  2. 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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