ETF Monthly commentary

Gold ETF assets realised their largest ever quarterly gain in Q1 2020

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Q1 2020 highlights

Global gold-backed ETFs (gold ETFs) and similar products added 298 tonnes(t), or net inflows of US$23bn, across all regions in the first quarter of 2020 – the highest quarterly amount ever in absolute US dollar terms and the largest tonnage additions since 2016. During the past year, gold ETFs added 659t, the highest on a rolling annual basis since the financial crisis, with assets under management (AUM) growing 57% over the same period.

March highlights

Globally, gold ETFs added 151t – net inflows of US$8.1bn (+5%) – in March, boosting holdings to new all-time highs of 3,185t.1 Trading volumes and AUM reached record highs as gold volatility increased to levels last seen during the financial crisis, yet gold price performance was mostly flat in US dollars for the month. Gold prices denominated in many other currencies, however, continued to reach all-time highs although the price in US dollars remained 15% below its 2011 high. This highlights a continued trend of growth in gold ETFs outside of the US over the past few years; a trend underscored by European funds seeing the largest absolute inflows and Asia and other regions registering the largest percentage growth during the month..

 

ETF flows 1

ETF flows chart

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

Regional overview

Uncertainty around the short- and long-term economic impacts of COVID-19 continues to drive sharp volatility across many assets, leaving global equities in bear market territory while encouraging inflows into safe-havens like US treasuries and gold. Against this backdrop, gold ETFs listed in all regions experienced strong inflows during the month.

European funds led regional inflows, growing by 84t (US$4.4bn, 5.8% AUM), while North American funds added 57t (US$3.2bn, 4%). Asian funds – primarily in China – also finished the month with strong inflows, adding 4.9t (US$309mn, 6.4%), and funds in other regions grew 9.4%, adding 4.7t and US$249mn.

Price performance

Despite finishing the month almost unchanged at US$1,609/oz, gold was incredibly volatile during March. This realised volatility of gold across tenors rivalled levels last seen during the European credit crisis in 2011 and the implied volatility – or how much investors expected gold would move across tenors – reached levels last seen during the global financial crisis. There are a number of reasons for this, as highlighted in our recent Investment Update: Gold prices swing as markets sell off.

We noted that when risk assets like stocks sold off sharply, investors needed to meet capital requirements; one way they were able to do this was to sell a liquid and outperforming asset like gold. At its trough, gold sold off 7% during the month, effectively giving up its yearly gains only to rebound later. US treasuries were also weaker intra-month, indicating that gold was not the only safe-haven asset to show weakness. However, similar to the 2008-2009 financial crisis, the major tail risk-hedge that worked well – and worked immediately – was the VIX index, and this could potentially give some foresight into upcoming gold price moves.

When stocks sold off sharply in 2008 gold experienced a few pullbacks, falling more than 30% from peak to trough but rallied back to close 4% higher on the year. What followed was the initial Quantitative Easing (QE) program in the US, along with similar monetary policy interventions worldwide, which propelled gold over 600% higher at its peak in September 2011. Other drivers included: higher risk, particularly in the European region, gold’s store of value quality coming to the fore and an improved opportunity cost in the face of lower rates. I the three months leading up to the September 2008 Lehman Brothers bankruptcy, gold-backed ETF flows were relatively unchanged. Following the QE announcement, gold ETFs added 146t, or 15% to their holdings over the next two weeks and a total of 235t, or 24% to their holdings through the end of 2008, with an additional 1,296t, or 107% in the following three years.

On the heels of the most recent sharp stock selloff this year, the US Federal Reserve (Fed), along with other central banks, instituted new QE programs, labelled by many as ‘QE Infinity’ as most countries have not placed a limit on the amount they are willing to purchase to help the markets. This pushed gold off its lows to close the month flat. Gold ETFs added roughly 109t or 3.7% to assets in 2020 leading up to the 19 February peak in the S&P 500. They have since added 189t, or an additional 6.3% to assets in six weeks. If the trend mirrors the financial crisis, we could see significant inflows in gold ETFs over the coming months, which has been the case to begin the month of April.

At the time of publication, gold has outperformed most major asset classes this year, up by more than 7%. Gold’s performance again distinguished itself from broader commodities, as the broader commodity indices fell over 13% on the month and oil (WTI) fell by a further 25%.

Gold global trading volumes averaged US$236bn a day in March, an increase of 61% y-o-y, while futures open interest decreased last month from US$122bn to US$106bn as a major futures expiration occurred in the second half of the month. COMEX net longs4, via the Commitment of Traders (COT) report, fell sharply in the early part of the month after hitting all-time highs of 1,209t (US$63bn) during February, but moved higher as gold rebounded.

Looking forward

Recent drivers of investment demand are expected to continue: widespread market uncertainty and the improved opportunity cost of holding gold as yields move lower. We have found that lower rates have a postive impact on gold prices and offer the opportunity for additional gold exposure (potentially replacing bonds) in a low-rate environment.

With the Fed taking interest rates to zero for the foreseeable future, gold could do well as it tends to outperform during easing cycles. Additionally, multi-trillion dollar fiscal stimulus policies to combat the economic impact of COVID-19 could prove inflationary – a development that could support gold prices in the long run.

We highlighted a number of current dynamics in our 2020 Outlook and we see those continuing to play out, albeit with more risk and uncertainty increasing investment demand. It is likely, however, that uncertainty and its economic impact will have a negative impact on gold demand for jewellery and bar and coin demand. Despite this, we believe investment demand could more than offset a reduction in consumer demand, as was the case with global gold demand in 2019.

Regional flows2

All regions had strong inflows in March

  • Holdings in European funds increased by 84t (US$4.4bn, 5.8% AUM)
  • North American funds had inflows of 57t (US$3.2bn, 3.9%)
  • Funds listed in Asia added 4.9t (US$309mn, 6.4%)
  • Other regions had inflows of 4.7t (US$249mn, 9.4%).

Individual flows

SPDR® Gold Shares and Invesco Physical Gold led global inflows

  • In North America, SPDR® Gold Shares led global inflows, adding 32.7t (US$1.8bn, 3.8%), while iShares Gold Trust added 13.2t (US$729mn, 3.7%). SPDR® Gold MiniShares led low-cost3 inflows, growing 15% or US$214mn, and Graniteshares Gold Trust grew 9%, adding US$67mn
  • Two UK-based funds led European-fund inflows and outflows: Invesco Physical Gold and iShares Physical added 33t (US$1.7bn, 22%) and 29t (US$1.5bn, 18%) respectively. Also, Amundi in France added 16t (US$819mn, 54%); the Xtrackers Physical EUR had outflows of 11.6t (US$581mn, 14.2%) and WisdomTree Physical Swiss Gold had outflows of 7.6t (US$383mn, 12.2%)
  • In China, Bosera Gold added 2.5t (US$141mn, 20.6%).

Long-term trends

Gold ETFs had their largest quarterly AUM increase

  • Over the past 12 months assets in global gold-backed ETFs have grown 56%
  • Following the March inflows, both holdings and assets of gold-backed ETFs are at all-time highs
  • UK-based gold funds continue to take regional and global market share, now representing 46% of European assets and 21% of global assets
  • Low-cost gold-backed ETFs in the US have seen positive flows for 21 of the past 22 months and have increased their collective assets by 263%.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.

  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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