3 May, 2017

Inflows into ETFs resumed in Q1; European investors continued to build strategic positions. Bar and coin demand rose 9% y-o-y.

  • Assets under management (AUM) in gold-backed ETFs increased in Q1 as political uncertainty fuelled European ETF inflows. European bar and coin demand was strong too
  • China’s quarterly bar and coin demand breached 100t for only the fourth time on record – currency weakness, concerns over the property market, and a seasonal boost from Chinese New Year underpinned the market
  • India’s bar and coin demand inched up, but remains at historically low levels. The industry, however, is confident the market will recover as the aftershock of demonetisation wanes
Tonnes Q1'16 Q1'17 YoY
Investment 606.9 398.9 -34%
Total bar & coin demand 264.9 289.8 9%
  India 27.5 31.2 14%
  China 81.3 105.9 30%
ETFs & similar products 342.1 109.1 -68%


Global holdings of gold-backed ETFs grew by 109.1t in Q1; total AUM in these products was 2,251.8t by quarter-end, worth just over US$90bn. This increase in holdings is dwarfed by last year’s huge growth: inflows were just one-third of the 342.1t seen in Q1 2016. But this is more an indication of the atypical strength of 2016 inflows than of recent weakness. Indeed, inflows of 109.1t are in line with quarterly average between Q1 2009 and Q4 2011 (108.7t), a period that encompassed the global financial crisis. 

Continuing the trend from the second half of 2016, European investors accounted for the bulk of investment in the sector in Q1: inflows into European-listed products were 92.4t, compared with just 14.1t added to holdings of US-listed products. Outflows were minimal during the quarter, indicating a generally positive underlying attitude towards gold-backed ETFs. 

Geopolitical tensions became more of a concern for European-based investors than for their US counterparts. Investors focused on the continued rise of anti-establishment parties associated with the growing populist movement across Europe, as well as the potential outcome of elections in the Netherlands and France – particularly in the aftermath of the Brexit vote. 

Concerns around the French Presidential election mushroomed with the late surge of far-left, anti-EU politician, Jean-Luc Mélenchon, at the end of the quarter. While the Macron/Le Pen run-off after the first-round had been predicted by the polls, Mélenchon’s gains – as well as the exceptionally high proportion of voters who were undecided – added to the political uncertainty. 

On top of a fragile political environment, conditions in financial markets gave investors a further incentive to build their positions in gold-backed ETFs. Safe-haven flows pushed two-year German yields further into negative territory, reaching a record low of -0.95% in February. And European equity markets were subdued with volatility at multi-year lows. Negative real and nominal yields coupled with a period of relative calm in regional stock markets improved the appeal of gold, particularly as its price strengthened through the quarter. The dips in the euro-denominated price of gold in January and March were also taken as a good opportunity to add it to portfolios.


Yield on two-year German debt fell to its lowest level on record

GDT Q1 2017 Investment - Yield on two-year German debt fell to its lowest level on record

Source: Bloomberg; World Gold Council

Data as of

In the US, net inflows of around 45t in February were sandwiched between outflows in January and March. Broadly, though, US investors maintained their underlying positivity towards gold. The bulk of holdings in US-listed products are in strategic hands after much of the looser, more speculative buying that was a feature of the sharp inflows in 2016 was reversed in the November/December washout. 

The gold market reacted positively to the Federal Reserve’s dovish guidance when it raised interest rates in March. Having edged lower in advance of the announcement, the gold price rebounded as expectations around future increases in US interest rates eased a little. 

The positive view of gold in the US is also well supported by the risks associated with the global geopolitical and economic backdrop (the ongoing crisis in Syria; uncertainty over Brexit; slowing growth in China; friction between the West and Russia; and more recently, tensions over North Korea’s nuclear program). And question-marks remain over the path of US growth and inflation. 

Outside of the US and Europe, net flows were minimal. China’s Huaan Yifu Gold ETF continued to outperform: holdings grew by a net 0.8t over the quarter, to 24.9t. But this was exceeded by outflows from other domestic ETFs, leading to net outflows from Chinese gold-backed ETFs of -0.8t.

Bars and coins

Bar and coin demand posted gains, up 9% on the same period last year, reaching 289.8t – equivalent to over US$11bn.  The strength of the retail investment market in the first quarter built on 2016’s exceptionally strong finish.


Bar and coin demand was up 9% year-on-year

GDT Q1 2017 Investment -

Source: Metals Focus; GFMS, Thomson Reuters; World Gold Council

Data as of

Demand in China soared in Q1, maintaining the strong momentum established in Q4 2016.  At 105.9t it was up 30% y-o-y and was the fourth strongest quarter on record. 

Several factors fuelled this boom. Concerns over the weakness of the yuan and the outlook for the real estate market from the tail-end of last year spilled over into 2017; this combined with the usual seasonal strength around Chinese New Year and a rising gold price to support investor sentiment.  

Innovation within the market is making gold even more accessible for retail investors.  Commercial banks are increasingly looking to develop their gold businesses to offer a compelling proposition to investors. Bank of China, for example, launched an interest-bearing gold product at the end of 2016. It is benchmarked on the Shanghai Gold Exchange (SGE)’s AU9999 contract with a minimum entry point of one gram and is traded online. It also gives investors the option of withdrawing physical gold through the bank’s extensive branch network. 

And the product pipeline doesn’t stop there. In the first quarter of this year, Industrial and Commercial Bank of China (ICBC) teamed up with Tencent to launch a new physical gold-backed product – Microgold – targeted at China’s internet users. Through WeChat – with over 800 million users China’s largest social networking app – Microgold users can invest in gold (based on ICBC’s gold accumulation plans), digitally send gold to friends and family in culturally significant red envelopes, and view real-time prices. This innovation will make gold easier to access for China’s digitally savvy millennials.  

Sales outside of the banking sector also did well. The SGE continued to gain market share, as high net-worth individuals increasingly used it to buy 1kg bars at low margins. Elsewhere, retailers performed well in the run up to Chinese New Year and in some instances demand exceeded supply; one retailer asked customers to wait until after the lunar New Year to take delivery of their investments. 

China appears to be suffering a demand/supply imbalance. Having closely tracked the global spot price since 2014 (premiums have averaged around US$4 over the global spot price in recent years) the local premium shot up in Q4 2016 to an average of US$17/oz. Demand has been healthy, but this was also in part because cross-border capital controls affected gold imports. The premium persisted in Q1, averaging US$14.2/oz, as the after-effects of capital controls rippled through the market and banks adapted to the increased regulatory oversight on imports.


China's premium over the global spot price has shot up in recent months

GDT Q1 2017 Investment - China's premium over the global spot price has shot up in recent months

Source: Shanghai Gold Exchange; ICE Benchmark Administration; Bloomberg; World Gold Council

Data as of

India’s bar and coin demand stood at 31.2t in Q1 – up 3.8t on last year’s low level, but just half its five-year quarterly average. This belies the modest improvement in the market following the sharp liquidity squeeze caused by demonetisation in November. Economic activity almost ground to a halt at the end of 2016 as cash was pulled from the economy – currency in circulation fell 50% from 11th November to 6th January. Sales of motorcycles – a good barometer of the health of the cash-reliant economy – halved in December. 

But 2017 has seen an improvement.  While the stock of cash is significantly off its peak of November 2016, it increased 43% in Q1 2017. As outlined in the Jewellery section of our report, the increased cash in circulation has helped the economy pick up a little, which in turn has supported the gold market. Gold imports have improved over recent months: Q1 official imports were 106% up on Q1 last year.  

Vietnamese investment demand increased 6% y-o-y.  Demand was supported by Chinese New Year and the traditional God of Wealth festivities, celebrated on the 10th day of the Lunar New Year. According to Vietnamese tradition, purchasing gold on God of Wealth day will bring a year of prosperity. Several traders reported strong sales. This demand was also supported by the recent depreciation of the Vietnamese dong.

The European bar and coin market is in good health. Our estimate for Q4 2016 was revised up, and the first quarter of 2017, at 60.8t, is up 9% y-o-y. At its core is a strong German market, up 13% y-o-y to 34.3t – the strongest first quarter since 2011.  Switzerland and Austria saw decent growth, as did the UK, which hit its highest level since Q2 2013. As with European-based institutional investors, the spectre of political uncertainty prompted retail investors to buy gold as a hedge against the flurry of elections in the Netherlands, France and Germany.   

The US market suffered in the first quarter.  Demand fell 20% to 16.2t, the lowest level of demand since Q2 2015, as retail investors shifted their focus away from gold to buy into the Trump-rally and chase equity markets higher. Dealers reported that many retail investors took advantage of the rise in the gold price to sell into the secondary market – at times these sales of bars and coins even matched consumer demand. Given this strength of supply it was not surprising to see imported bullion coins fall 22% and US Mint combined Eagle and Buffalo sales fall by around 30% y-o-y.

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