ETF Monthly commentary

Gold ETFs close H1 with record US$40bn of net inflows

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June highlights

Gold-backed ETFs (gold ETFs) recorded their seventh consecutive month of positive flows, adding 104 tonnes (t) in June – equivalent to US$5.6bn or 2.7% of assets under management (AUM) – taking global holdings to new all-time highs of 3,621t1. This brings H1 global net inflows to 734t (US$39.5bn), significantly above the highest level of annual inflows, both in tonnage terms (646t in 2009) and US-dollar value (US$23bn in 2016). To put this strength of demand into context, H1 inflows are also significantly higher than the multi-decade record level of central bank net purchases seen in 2018 and 2019, and could absorb a comparable amount of about 45% of global gold production in H1 20202.

In June, global gold ETFs registered three consecutive days of outflows near the beginning of the month – the first consecutive daily declines since March – before regaining momentum. All regions saw net inflows during the month, with North American funds accounting for the lion’s share.

 

ETF flows 1

ETF flows chart

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

Regional overview

North American funds dominated activity in June, accounting for 80% of global net inflows. The region added 83t (US$4.6bn, 4.3% AUM). European-listed funds added 18t (US$745.7mn, 0.8% AUM), with Swiss- and German-based funds seeing the highest increases and offsetting declines in UK-based funds. Asian-listed fund holdings rose fractionally during the month, by 0.4t (US$36.7mn, 0.6% AUM), with India-based funds seeing the largest increase in the region. Funds listed in Other regions registered a 3t (US$150.1mn, 4.4% AUM) increase.

Macroeconomic drivers

Stock markets started the month positively, with optimism growing as economies around the world began to emerge from their respective lockdowns. US stocks were boosted by a jobs report that defied dire expectations and showed a fall in unemployment from 14.7% to 13.3%3. In Europe, the easing of strict lockdown restrictions in several economies gave investors further hope for a recovery in the global economy. However, as the month progressed, this positive sentiment was replaced by concerns over increasing COVID-19 infection rates in various locations and the potential for a second wave.

Despite the better-than-expected US jobs report for May, and emerging signs of recovery in the US economy following the COVID-19 lockdown, Federal Reserve (Fed) Chairman Powell remained cautious, saying that the Fed is “…strongly committed to using our tools to do whatever we can for as long as it takes…”. While the potential for further accommodative monetary policy measures has been generally seen as positive for stocks, the cautious tone reinforced a more general risk-off sentiment, as many market participants started to shift expectations that any economic recovery will likely be slower (U-shaped) as opposed to swifter (V-shaped).

Speculation over the potential impact of a second wave of COVID-19 infections on an already fragile global economy caused a renewed wave of fear and uncertainty. Meanwhile, ongoing asset purchases by central banks to mitigate the impact of the pandemic further reduced the opportunity cost of holding non-yielding assets such as gold. These factors continued to drive gold investment demand, with gold ETFs a key beneficiary of this momentum.

Price performance

Gold in US dollars extended its y-t-d gains in June, as it rose 2% to finish at US$1,768.1/oz – reaching its highest level since October 2012. Gold volatility remained below the elevated levels seen in March and April (>30%), with 30-day realised volatility decreasing to around 14%-15% in June. Implied volatility remained steady during the month, oscillating around 20%, indicating that investors are expecting more short-term movement in the gold price.

Gold continued its outperformance of other major asset classes in June and has gained more than 17% over the first half of 2020. This compares with global stocks, which remain below the level they started the year, and broader commodities – represented by the S&P GSCI – which are down 20%-30% y-t-d. Oil (WTI) continues to be one of the worst performing assets this year, down by nearly 34%.

Global gold trading volumes fell to US$156.9bn a day in June, down 6% from US$167.6bn in May. Daily trading volumes remain below the y-t-d record of US$233bn seen in March, but comfortably above the 2019 daily average of US$145.7bn. COMEX net longs, via the Commitment of Traders (COT) report, fell to 701t – their lowest level since June 2019, before recovering towards the end month to 857t, 30% below February’s all-time high of 1,209t (US$63bn)4.

Looking forward

The economic and geopolitical environment remains supportive for gold investment, with most of the existing gold demand drivers still relevant. The opportunity cost of holding gold remains low, as continued central bank activity keeps interest rates low or negative, while several countries continue to experience high levels of tension/unrest.

And there are serious concerns that the trajectory of the COVID-19 pandemic threatens any nascent economic recovery. Growing infection rates across some parts of the world, particularly in the US, suggest that there is some way to go before economies can reopen with confidence. In a recent media briefing, Dr Tedros Adhanom Ghebreyesus, head of the World Health Organization (WHO), warned that: "Although many countries have made some progress, globally the pandemic is actually speeding up"5., meaning that investors will continue to face heightened risk and uncertainty.

Regional flows6

North American funds dominate inflows in June

  • North American funds had inflows of 83t (US$4.6bn, 4.3% AUM)
  • Holdings in European funds increased by 18t (US$745.7mn, 0.8%)
  • Funds listed in Asia saw holdings rose marginally by 0.4t (US$36.7mn, 0.6%)
  • Other regions had inflows of 3t (US$150.1mn, 4.4%).

Individual flows

SPDR® Gold Shares and iShares Gold Trust represented 67% of all global inflows in June

  • In North America, SPDR® Gold Shares led global inflows, adding 56t (US$3.2bn, 5.1%), while iShares Gold Trust added 14t (US$794.7mn, 3.2%). SPDR® Gold MiniShares led low-cost inflows adding 5t (US$295.2mn, 13.6%), followed by Aberdeen Standard Physical Gold Shares, which added 2t (US$98.9mn, 4.8%)
  • In Europe, French-listed Amundi Physical Gold ETC saw the largest inflows of 10t (US$581mn, 21.1%), with German-listed Xetra-Gold adding a further 7t (US$286.2mn, 2.4%), while holdings of Invesco Physical Gold ETC in the UK decreased by 4t (US$217mn, 1.9%)
  • In China, Huaan Yifu shed 2t (-US$111mn, -6.9%), offsetting gains elsewhere in Asia
  • A new fund listed in Saudi Arabia – Albilad Gold ETF – was launched in June. Its assets at the end of the month totalled 1t (US$41.2mn). This was one of two new funds added to our universe in June, the others being ChinaAMC Gold ETF with assets of 0.5t.

Long-term trends

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

  • Over the first six months of 2020, global gold ETF holdings (in tonnage terms) have increased by 25%
  • Holdings in both tonnage and value terms continue to reach new highs
  • North American and European funds now account for 52% and 43% of global tonnage holdings respectively. The market shares from these two regions has been diverging since late March
  • Low-cost gold-backed ETFs in the US now stand at 108t (US$6.1bn) in collective holdings. 7
  • 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. Estimate of H1’20 global mine production is calculated by discounting H1’19 of 1,668t by 3%, which is the y-o-y decline in global mine production in Q1’20.

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

    4. 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.

    5. 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.

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