Stock markets rallied in May in nearly every major country. In the US, as one example, stocks were up by almost 40% from late March lows, the strongest two-month performance since 2009. Global stocks collectively were higher by 6% during the month. Despite this seemingly bullish environment for risk assets, various drivers propelled the gold price and gold ETF inflows including:
- The economic and social impact of COVID-19, as most economies remain shut down or are slowly reopening.
- Tensions between the US and China continue to escalate.
- Labour markets are facing challenges not seen in generations. In the US, the unemployment rate is already at 14% and may soon reach levels last during the Great Depression of the 1930s.
Ongoing asset purchases by central banks
- Monetary policy intervention is expanding into asset classes that would have seemed incredibly unlikely even a few months ago, such as high yield (junk) bond ETFs in the US. This has helped push bond yields even lower, reducing gold’s opportunity cost further and adding to market uncertainty as we are in unchartered waters.
As investors look to hedge the economic risks of ballooning budget deficits and high valuations for both stocks and bonds, collective holdings of gold ETFs have now surpassed Germany’s official gold reserves and exceed the official gold reserves of every country except for the US. This also highlights the increasing acceptance of gold ETFs among investors as a means to gain exposure to gold.
Gold in US dollars was higher by 2.6% in May, finishing the month at US$1,728/oz. Gold volatility decreased significantly from the extreme levels in March, and 30-day realised volatility fell by nearly half from 29% in April to 15% in May. Implied volatility – or how much investors expected gold would move across tenors – remained somewhat elevated, signaling that investors expect meaningful moves in the gold prices in the near-term.
At the time of publication, gold has outperformed most major asset classes this year, up by more than 15%. Gold’s performance continues to distinguish itself from the wider commodity spectrum, as broader commodity indices are down 22% - 30% this year and oil (WTI) is down by more than 40%. Oil did see a significant jump in May, up over 70%, albeit off a very suppressed level, to finish back above US$30 a barrel.
Gold global trading volumes, picked up in May, rising from US$140bn in April to US$164bn during the month, as other asset class volumes experienced a sharp decline. Gold trading volumes are far below the y-t-d record of US$233bn a day in March, but above the 2019 daily average of US$145bn. COMEX net longs4, via the Commitment of Traders (COT) report, fell sharply to 789t, the lowest levels in one year, and below the all-time highs of 1,209t (US$63bn) experienced in February this year.
Many of the positive gold demand drivers remain, with a few additions:
- The lower rate environment, driven by continued central bank activity, coupled with an uptick in inflation expectations
- COVID uncertainty, both from an economic and social perspective, as well as the potential for a second wave of outbreaks
- Future stock earnings expectations have fallen, driving valuations even higher. Our recent Investment Update: Gold, an efficient hedge notes a viable argument for using gold as a portfolio hedge
- Race-related civil unrest in the US has recently emerged, creating additional uncertainty in markets
North American fund holdings reached all-time highs in May
- North American funds had inflows of 102t (US$5.6bn, 5.6% AUM)
- Holdings in European funds increased by 45t (US$2.4bn, 2.9%)
- Funds listed in Asia added 4.8t (US$262mn, 4.7%)
- Other regions had inflows of 2.6t (US$136mn, 4.3%).
SPDR® Gold Shares and iShares Gold Trust represented 57% of all global inflows in May
- In North America, SPDR® Gold Shares led global inflows, adding 67t (US$3.7bn, 6.4%), while iShares Gold Trust added 20t (US$1.1bn, 4.7%). Aberdeen Standard Physical Gold Shares led low-cost3 inflows adding 4.1t (US$225mn, 12.5%), followed by Graniteshares Gold and SPDR® Gold MiniShares which each added US$85mn.
- Two UK-based funds led European-fund inflows: iShares Physical added 23.3t (US$1.3bn, 11.8%), Invesco Physical Gold added 6.9t (US$384mn, 3.5%).
- In China, Huaan Yifu added 1.5t (US$83mn, 5.5%). Two new funds (ICBC Credit Suisse Gold and Frist Seafront Gold) were listed in China during the month. Their collective assets of 2.3t add 4% to China’s total gold ETF assets.
Gold ETF assets have experienced the largest calendar-year asset growth in only 5 months
- Over the past 12 months assets in global gold-backed ETFs have nearly doubled (+90%)
- Following the May 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 48% of European assets and 21% of global assets
- Low-cost gold-backed ETFs in the US have doubled their collective holdings in the past year to 99t, which is roughly the size of all Asian-based funds3