Holdings in global gold-backed ETFs increased to 2,400.3t by the end of Q1 – the highest month-end total since April 2013 – as the sudden return of volatility to global financial markets encouraged US investors to seek refuge in gold. Inflows of 32.4t were, however, far lower than the 96t of inflows seen in Q1 2017. At a regional level, US-listed funds were the only area of growth; European- and Asian-listed funds saw modest outflows.1
2017 was a year of exceptionally low stock market volatility: the VIX index fell to a record low in November, setting the seal on the least volatile year in its 25-year history. But that changed in February 2018. Investors were rattled by the increasingly hostile trade war rhetoric between the US and China as well as a potential wave of regulations taming the US tech titans. Volatility rocketed as equities first fell, then see-sawed, before closing the quarter down. By contrast, gold traded in a relatively steady range over the quarter, rising just 3% in US dollar terms.
Investment in gold-backed ETFs gathered some pace from H2 2017. But inflows were notably weaker compared with Q1 2017, a period when negative German yields reached a record low and the gold price gained almost 10%. The environment during the first three months of 2018 was more varied: a relatively stable gold price and rising interest rates contrasted with sharp equity market volatility and periods of heightened geopolitical risk to create mixed signals for gold investors.
North American-listed ETFs saw their strongest quarterly inflows since Q2 2016, as investors added 38.4t to their holdings. Investment picked up in January as the weakening US dollar helped push up the price of gold, towards a key level around US$1,360/oz – US$1,365/oz (the peak from mid-2016). Inflows strengthened further as stock markets were rocked by a couple of sharp pullbacks. Although equities subsequently recovered some of these losses, they remained turbulent for the rest of the quarter. Gold was contrastingly stable, trading in a relatively narrow US$40 range. In fact, the three-month volatility of the S&P500 surpassed that of gold for the first time since 2015.2
Investment in Europe was more or less flat: investors reduced holdings of ETFs by 1.2t. Small inflows in January (+7.6t) briefly saw holdings in European-listed ETFs reach a record high of 1,007.4t, before subsiding back to 998.7t by end-March. Outflows from London-listed funds outweighed modest inflows into German-listed ETFs. Investors in both regions were uninspired by the relatively subdued Q1 local price performance.
Holdings in gold-backed ETFs in the Asian region fell by 3.6t in Q1, due to outflows from China. The unwinding of Bosera’s unlisted (I Shares) fund was partly offset by growth in the Bosera Gold Exchange-Traded Open-End Fund as some investors transferred their positions from the former to the latter. The Open-End Fund held 12.8t at the end of Q1, making it the second largest Chinese-listed fund behind Huaan Yifu (with assets of 17.2t).
Q2 began with significant investment in gold-backed ETFs in North America and Europe; inflows of 70t (US$3bn) occurred during the first three weeks of April alone. European investors responded to the trade war rhetoric between the US and China by adding to their ETF holdings in recent weeks. Add into the mix the outbreak of tensions between the US and Russia over Syria, and the environment for investment in gold-backed ETFs looks supportive.
Bar and coin
The retail investment market also weakened in Q1, as investors were discouraged by a relative lack of price volatility. Global bar and coin demand was 254.9t in Q1 2018, 15% lower than the same period last year. However, Q1 2017 was relatively strong, as investors responded to heightened political uncertainty and fears of currency weakness. Such concerns have since faded and, coupled with a range-bound gold price across most major markets, the year started with relatively subdued bar and coin demand.
Demand in China, the world’s largest bar and coin market, fell 26% y-o-y to 78t. This is largely because investors’ worries around the strength of the yuan, which saw them flock to gold to protect their wealth twelve months ago, have eased. Since the end of March 2017, the yuan has appreciated by around 9%. Demand was further dampened by a quiet price environment, where gold was caught within a relatively narrow sideways range.
This annual comparison does not paint a complete picture. Q4 2016 and Q1 2017, when worries about a weakening yuan were at their most intense, were exceptionally strong: demand was above 100t in both quarters. At 78t, Q1 2018 is relatively healthy: it is above both the three- and five-year averages (of 68.3t and 71.2t respectively). Industry contacts reported a spurt of activity when the Shanghai Stock Composite Index plummeted in February and a boost to gold demand from increasingly hostile US trade rhetoric.
India’s bar and coin demand fell 13% to 27.9t. The government’s focus on unaccounted income continued to crimp this part of the market, with retail investors wary of heightened surveillance. There was little activity even as the BSE Sensex tumbled. Dealers also reported a negative spill-over from the faltering real estate market, traditionally a source of cash with which to fund gold purchases, as property investors nursed losses from sliding real estate prices.
India’s innovative digital gold-trading platforms, which we commented on last quarter, reportedly continued to gain traction. Mobile wallet firm Paytm, for example, announced that its gold sales had risen to 20kg during the Akshaya Tritiya festival, three times higher than the same day in 2017. And digital payments firm PhonePe stated that more than 45kg of gold transactions were conducted via its app during the festival period.
The US market remained mired in the doldrums, with Q1 demand at its lowest since Q1 2008 – just 3.7t. A buoyant economy coupled with a lacklustre gold price saw US Mint Eagle sales fall 59% y-o-y in Q1 2018. The February spike in the VIX index – a measure of the S&P 500’s volatility – did not have the same impact as it did on investors in US-listed ETFs.
European demand was down 39% to 39.8t. Losses were spread across Germany, Switzerland, Austria and the UK. Demand was boosted last year by political uncertainty in advance of the flurry of elections in the Netherlands, France and Germany. As elections passed largely as expected, uncertainty faded and the euro appreciated, which in turn pushed down the euro-denominated gold price. In addition, the European economy remained in good shape and many investors held their positive stance towards equity markets, despite the recent bout of volatility.
Demand for freshly minted coins was particularly weak in Europe. The dearth of demand in the US resulted in significant secondary market activity as coins – especially Krugerrands – were shipped across the Atlantic in search of buyers.
Elsewhere in the world, some markets saw demand grow. Bar and coin demand in Turkey bounced back after a quiet end to 2017 to reach 13.1t, up 160% q-o-q and 47% y-o-y. Two factors underpinned this buoyant market. On the one hand the economy was motoring: last year it was the fastest growing in the G20. On the other, vulnerabilities were building: inflation was rising, the current account deficit was widening, and the lira was weakening. Perhaps unsurprisingly, Turkish investors turned to gold to protect some of their wealth.
Middle East demand was boosted by a strong performance in Iran, where bar and coin demand reached its highest level since Q1 2015. Investor concerns over worsening Iranian-US relations and the prospect of currency controls fuelled a flight to gold. Iranian bar and coin demand was 9.3t, up 250% y-o-y.
Other parts of the region were quiet, with modest declines in Saudi Arabia and the UAE. Concerns around rising living costs, falling numbers of gold-buying tourists from India and Qatar, and fears over job security, all hampered the market.
Demand from countries in South East Asia was steady, with all markets registering modest gains. Thailand and Vietnam both benefited from strong economies, with bar and coin demand rising 4% and 5% respectively. The World Bank expects the Thai economy to grow at its fastest pace since 2012 fuelled by strong exports, while Vietnam grew at an annualised rate of 7.4% in Q1 2018, pushing consumer sentiment to a three-year high. This economic optimism coincided with “God of Wealth Day”, a significant traditional gold-buying event in the Vietnamese-Chinese calendar.