ETF Monthly commentary

Global market volatility drove gold ETF assets to new all-time highs

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February Highlights

Global gold-backed ETFs (gold ETFs) and similar products added 84.5 tonnes(t), or net inflows of US$4.9bn, across all regions in February, boosting holdings to new all-time highs of 3,033t.1 Combined with a gold price increase of nearly 2%, assets under management (AUM) grew 4.4% in US dollars during the month, breaching the previous September 2012 record high. At that time, the gold price was 10% higher than current levels, highlighting two interesting trends: 1) the global growth in gold ETFs outside of the US; and 2) that US investors have not yet increased their gold allocations as much as they did in 2012.

 

ETF flows 1

ETF flows chart

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

Regional overview

Market uncertainty surrounding the potential impact of the coronavirus outbreak on the global economy drove strong inflows to all regions during the month. North American funds led regional inflows (+42t, US$2.3bn, 2.9% AUM), while European funds added 2.8% to assets (+33t, US$2.0bn). Asian funds, primarily in China, also finished the month with strong inflows, adding 8.7t (US$425mn, 9.5%), while funds in other regions grew 6%, adding 0.8t and US$132mn.

Price performance

The LBMA Gold Price reached an intra-month high of US$1,672/oz during the last week of February – levels last seen in 2013 – but gave back some of those gains to finish the month up 1.6% in US-dollar terms.

Prior to the late-month move in the markets, leverage in risky assets like stocks were at a lofty level. Uncertainty around global health and safety and its potential economic impact caused market volatility and de-risking. The quick, sharp sell-off in stocks may have caused margin calls – where liquidity sourcing from assets like gold was required – as stocks finished the month with the worst weekly performance since the financial crisis.

At the time of publication, gold has outperformed most major asset classes this year and is the only one in positive territory at this point, higher by over 8%. Gold’s performance separated itself from broader commodities, once again, as the broader commodity indices fell between 7% and 11% on the month and oil (WTI) fell another 15%.

Gold global trading volumes averaged US$195bn a day in February, an increase of 34% y-o-y, while futures open interest increased 27% to US$122bn. COMEX net longs4, via the COT report, hit all-time highs of 1,209t (US$63bn) during the month, a sign of overall bullish positioning. However, past instances of extreme bullish and bearish positioning that are not supported by a broader set of investors have often been followed by price reversals.

Looking forward

Multiple drivers continue to support the demand for gold moving forward. US Treasuries have been the recipient of risk-off flows. The US 10-year and 30-year bond rates continue to hit all-time lows, improving the opportunity cost of holding gold. We have found that lower rates have a positive impact on gold prices and offer the opportunity for additional gold exposure (potentially replacing bonds) in a low-rate environment. Additionally, the Federal Reserve made a surprise 50bps rate cut in an attempt to ease concerns about the coronavirus effects. Futures in the US are pricing in a total of 100bps of cuts in 2020, which would take the target rate down to 50-75bps. The impact of monetary policy on gold highlights how gold tends to outperform during easing cycles.

Our 2020 Outlook themes remain constant. We expect market risk and slowing economic growth interaction to impact gold prices, particularly as the financial effects of the coronavirus are realised. Additionally, lower interest rates, increased gold price volatility and central bank intervention could continue.

Gold-backed ETF inflows, alongside central bank purchases and gold reserves, were a large driver of global gold demand in 2019, despite decreased jewellery and bar and coin demand – the result of higher gold prices. This dichotomy is likely to continue as market uncertainty could drive inflows into gold investments, while economic slowing, particularly in China, could hurt jewellery and technology demand.

Regional flows2

All regions had strong inflows in February

  • North American funds had inflows of 42t (US$2.3bn, 2.9% AUM)
  • Holdings in European funds increased by 33t (US$2.0bn, 2.8%)
  • Funds listed in Asia added 8.7t (US$425mn, 9.5%)
  • Other regions had inflows of 0.8t (US$132mn, 5.5%).

Individual flows

SPDR® Gold Shares and Xtrackers Physical Gold led global inflows

  • In North America, SPDR® Gold Shares led global inflows adding 31.0t (US$1.6bn, 3.5%) while iShares Gold Trust added 5.9t (US$313mn, 1.7%). SPDR® Gold MiniShares led low-cost3 inflows, growing 8.5% or US$108mn, and Aberdeen Standard grew 6%, adding US$82mn
  • Two Xtrackers funds led European-fund inflows and outflows. The Xtrackers Physical Gold fund added 9.7t (US$511mn, 14.5%), while the Xtrackers Physical Gold Euro Hedged fund had outflows of 6.5t (US$313mn, 11.6%). iShares Physical Gold, Amundi Physical Gold and WisdomTree Physical gold each added 5-6t or US$230-US$300mn
  • Huaan Yifu Gold, in China, added 2.0t (US$101mn, 9.4%).

Long-term trends

Gold ETFs added 5% in the first two months of 2020

  • Over the past 12 months, assets in global gold-backed ETFs have grown nearly 50%
  • Following the February inflows, both holdings and assets of gold-backed ETFs are at all-time highs
  • UK-based funds continue to take regional and global market share, now representing 44% of European assets and 20% of global assets
  • Low-cost gold-backed ETFs in the US have seen positive flows for 20 of the past 21 months and have increased their collective assets by 223%.3

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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