ETF Monthly commentary

Appetite for gold ETFs in Asia increased as global demand levels off overall

Published:

Revised 11 September 2020

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August highlights

Gold-backed ETFs and similar products (gold ETFs) recorded their ninth consecutive month of inflows in August, albeit at their slowest pace for 2020. Collectively, gold ETFs added 39 tonnes (t) during the month, equivalent to US$2.2bn or 0.9% of assets under management (AUM) as the price of gold reached a record high of US$2,067 early in August. As equities continued to climb to new all-time highs, interest rates rose and yield curves steepened, investor positioning in the gold market consolidated later in the month and the gold price ended the month slightly lower (-0.38% or US$1,957/oz) for the first time in five months.

Year-to-date global net inflows of 938t (US$51.3bn) have taken collective gold ETF holdings to a fresh new all-time high of (3,824t) and AUM (US$241bn).

 

ETF flows 1

ETF flows chart

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

Regional overview

Strong inflows continued in North America as holdings increased by 39t (US$2.5bn, 1.9% AUM), with all 16 funds listed in the region growing in August. There was a meaningful increase in Asian-listed gold ETF assets of 8.9t (US$552mn, 7.7% AUM) driven by investor appetite and new funds launched in the region. Two new Chinese funds joined our Asian gold ETF regional universe. In India, Nippon India Mutual launched a multi-asset fund in August that will partially invest in gold ETFs and gold derivatives. While this fund does not qualify as a gold-backed ETF by our definition, it is an example of the growth of the gold ETF market in India. Funds listed in other regions experienced modest inflows of 1.9t (US$108mn, 2.7% AUM).

European funds had net outflows of 11t (US$938mn, 0.9% AUM) for the first time since November 2019, driven by outflows from German-based gold-ETFs. A stronger euro, which has appreciated 9% against the US dollar over the past four months, along with improving investor sentiment in the region could have also played a role in the outflows.

Liquidity and positioning suggest increased strategic investment

The gold price hit an all-time high early in August on higher trading volume, but remains well below the inflation-adjusted, all-time high of US$2,800/oz. Volumes rose once again to US$235bn a day. At the same time, broad market stock volumes fell meaningfully during the month. As an example, the most liquid, broad-market stock index ETF in the US, traded 50% below its 2020 daily average volume during the month. The Commitment of Traders (COT) report for COMEX gold futures quantifies speculative positioning in the futures market, which can sometimes serve as a contrary indicator at extreme bullish or bearish levels. But this year the net long position peaked in February at 1,209t (US$63bn)2, and has subsided meaningfully to 778t in August (US$49bn) despite gold pushing up to new highs. We believe that an increased cost of ownership on gold positions held via COMEX gold futures has deterred participation in this market, reducing the usefulness of COT analysis.

Low rate expectations, and higher inflation allowances could bode well for gold prices

Late in the month, Fed Chairman Jerome Powell announced a major shift in US Federal Reserve (Fed) policy. The US will no longer pre-emptively increase rates to cool higher inflation, suggesting that rates could remain near zero for many years. This monetary policy philosophy may trickle into other regions and may keep negative real rates prevalent across most the globe for a long time. Late in the month, the ECB went as far to say that their negative rate policy has been successful so far, also suggesting their policies could remain for the foreseeable future. In turn, asset allocation strategies may need to be re-evaluated, as noted in our Gold Mid-Year Outlook.

One of the four key drivers of gold demand relates to gold’s attractiveness — or opportunity cost — relative to other assets. Gold does not pay a dividend or coupon like stocks and bonds because it carries no counterparty risk which may deter some investors. However, this potential headwind largely dissipates in the current rate environment. Real rates in all developed countries are all effectively in negative territory, which should keep the opportunity cost of gold lower for longer.

Also, the shift to allowing higher inflation could help gold pricing as well. Gold is seen as a well-established global inflation hedge, historically achieving stronger returns in higher inflationary markets. In the US, for example, since 1971, the nominal returns of gold with CPI levels below 3% have averaged nearly 6%, while returns in inflation environments above 3% have averaged 15%.

Looking ahead

From a technical perspective, the overbought conditions we discussed earlier in August have largely subsided with the Relative Strength Index (RSI) – a common metric for gauging momentum – falling from extreme levels near 90, to levels closer to 50, usually seen as a more neutral level. The gold price also appears to be forming a technical base above US$1,900/oz, which could act as support for a potential leg higher in the price.

The disconnect between economic and geopolitical data and risky assets like stocks remains. Technology companies in the US have reached valuation levels last seen during the tech bubble in the early 2000s. The market capitalisation of Apple, for instance, eclipsed the entire FTSE Index in Europe and the Russell 2000 in the US. Tesla became the seventh largest company in the US, just behind Berkshire Hathaway. And many stock indices in Europe have turned positive on the year with improving sentiment in the region. At the same time, both investment grade and high yield corporate debt has reached all-time levels with central bank support.

As we noted in our recent Gold Demand Trends: Q2 2020 and July ETF report, economic weakness has significantly hurt jewellery, bar and coin, and technology demand, which have averaged 86% of total gold demand over the past 10 years. But the combination of high risk, low rates and positive momentum appear to be more than offsetting the shortfall driven by economic weakness. With the recent demand shift, only 32% of demand came from jewellery, bar and coin and technology in Q2 2020, with the remainder coming from investments—like gold ETFs—and central banks.

In our Gold Mid-Year Outlook, we noted a growing consensus that the V-shaped recovery may be morphing into a U-shaped recovery, or that we could even experience more of a W-shaped recovery amidst subsequent waves of infections. At present, COVID cases appear to be resurfacing, not just in the US but in other countries that had earlier appeared to contain the outbreak. The ultimate effect of this is still very much unknown.

Regional flows3

Asian fund demand supported continued North American demand in August

  • North American funds had inflows of 39t (US$2.5bn, 1.9% AUM)
  • Holdings in European funds decreased by 11t (US$938mn, 0.9%)
  • Funds listed in Asia saw holdings rise by 8.9t (US$552mn, 7.7%)
  • Other regions had inflows of 1.9t (US$108mn, 2.7%).

Individual flows

All North American gold ETFs had inflows in August

  • In North America, iShares Gold Trust led global inflows, adding 13.9t (US$897mn, 2.9%), followed by SPDR® Gold Shares which added 9.5t (US$662mn, 0.8%); the low-cost space was fronted by SPDR® Gold MiniShares growing by 4.6t (US$296mn, 9.2%) and Aberdeen Standard Physical Gold Shares, which added 3.0t (US$197mn, 7.6%)
  • In Europe, Invesco Physical Gold ETC was the only fund with meaningful inflows adding 5.1t (US$315mn, 2.3%). Three German funds led global outflows: Xtrackers Physical Gold Euro Hedged 7.5t (US$504mn, 12.5%), followed by Xetra 4.5t (US$314mn, 2.2%) and Xtrackers Physical ETC 1.3t (US$86mn, 2.0%)
  • Two new funds were listed in China (Fullgoal Shanghai Gold ETF and GF Shanghai Gold ETF), collectively adding over 3t to the Asian region. Bosera’s listed fund led the regions inflows with 2.7t (US$173mn, 19.3%)
  • In other regions, ETFS Metal Securities in Australia added 1.3t (US$79mn, 5.4%).

Long-term trends

Y-t-d gold ETF inflows have surpassed the largest annual gain of 646t seen in 2009 by nearly 50%

  • Over the first eight months of 2020, global gold ETF holdings (in tonnes) have increased by 38%
  • Collective gold ETF AUM has grown 70% this year through August
  • Holdings in both tonnage and value terms continue to reach new highs
  • North American funds represent 2/3 of global net inflows 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.

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

  3. 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.

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