The coronavirus pandemic – and the global response to it – had a far-reaching impact on gold investment in Q1. At the total level, investment in Q1 grew 80% y-o-y to a four-year high of 539.6t. Bar and coin investment was down 6% from Q1 2019 at 241.6t. ETFs, however, attracted 298t of inflows, boosting global holdings to new highs.
On one hand, fears over the economic and social impact of the virus drove safe-haven flows into many investment products, most notably gold ETFs and official gold coins, fuelling the gold price. But on the other hand, concerns over the gloomy economic outlook combined with higher gold prices encouraged many to sell their existing holdings in an effort to combat the financial hardship imposed by the outbreak. And investment simply came to a halt in some jurisdictions as markets shut down, preventing investors from buying.
Global holdings of physically-backed gold ETFs (gold ETFs) and similar products jumped by 298t during Q1 – the highest quarterly inflows for four years. In value terms, assets under management (AUM) in these products increased by a record US$23bn over the quarter on the back of a 10% increase in flows combined with a 6% quarterly increase in the gold price. Holdings reached a new historical high of 3,185t by the end of the quarter.
Inflows gathered momentum throughout the quarter, as the coronavirus pandemic took hold. The year started with moderate inflows into gold ETFs, most of which were directed into UK-listed funds as the Brexit deadline loomed. The 4.6% rise in the US dollar gold price during January also invited momentum inflows. Coronavirus concerns started to take hold in earnest during February and the pandemic was the key driver of investment into these products for the remainder of the quarter, fuelling inflows across all regions. European-listed funds attracted the biggest inflows in Q1: holdings in the region grew by 150.1t (+US$8bn). North American-listed funds were not far behind, with inflows of 128.5t (+US$7bn). Asian products also experienced inflows, despite the shutdown measures during the quarter.
Extraordinary volatility in global financial markets had mixed implications for gold. Volatility in global financial markets rocketed in February as the spread of COVID-19 accelerated around the world. Stock markets suffered a steep sell-off and the broader commodity indices saw sharp losses. And gold was also very volatile in March, a topic we covered in our recent Investment Update: Gold prices swing as markets sell off. On the one hand, gold benefitted from strong safe-haven flows as investors grappled with the uncertain short- and long-term economic impacts of the pandemic and an environment of ultra-low interest rates. But on the other hand, gold was sold amid widespread asset liquidations, which affected even long-term US Treasuries. Gold was reportedly used as a source of liquidity by investors needing to meet margin calls on risk assets as they sold off.
At its trough, gold sold off 7% during March – effectively giving up its y-t-d gains – before rebounding later in the month.
Gold found further support from the unprecedented action taken by global central banks to curb the economic impact of the pandemic. A concerted round of interest rate cuts, combined with trillions of dollars in both quantitative easing measures and fiscal support, helped lift gold after its initial March pullback.
While the US dollar gold price remained below its 2011 peak, gold prices denominated in many other currencies continued to reach new all-time highs in Q1. This signals a continuation of the trend from recent years of growth in gold ETFs outside of the US; a trend underscored by European funds seeing the largest absolute inflows in Q1, and Asia and other regions registering the largest percentage growth.
Uncertainty around the short- and long-term economic impacts of COVID-19 continues to drive sharp volatility across many assets, with oil prices slumping, global equities fluctuating well below recent highs and safe havens like US treasuries and gold witnessing inflows. The first few weeks of April have seen strong inflows continuing into gold-backed ETFs, taking holdings to fresh record highs.
Bar and coin
A surge in Western demand for gold coins offset a fall in bar investment across Asia: total bar and coin investment of 241.6t was 6% lower y-o-y. Global bar investment in Q1 dropped 19% y-o-y to 150.4t. Demand for small bars is far more prevalent in east Asian markets, which were among the earliest to be hit by the coronavirus and lockdown measures. Local record high gold prices in these markets also encouraged profit-taking at points during the quarter. Coin demand took up the slack: it jumped 36% to a three-year high of 76.9t thanks to a sharp rebound in demand from Western investors. Gold-positive sentiment early in the quarter (due to ultra-low or negative interest rates, a slowing German economy and Brexit uncertainties) accelerated as the spread of COVID-19 fuelled safe-haven demand.
Bar and coin demand in China was another victim of the COVID-19 outbreak in Q1, falling 48% y-o-y to 39.3t. Usually a high point in the retail investment calendar due to Chinese New Year, this represents the lowest Q1 for Chinese retail investment since 2010.
January’s traditional Chinese New Year-related uplift in gold bar and coin demand not only failed to materialise, but instead delivered a material decline – mainly due to price volatility at that time. And when the government subsequently introduced measures to control the spread of coronavirus, demand collapsed. Deserted stores, the ever-rising gold price and consumers’ limited budgets all clamped down on bar and coin sales.
As China gradually re-opened towards the end of the quarter, demand showed something of a rebound, although not of a sufficient magnitude to offset the preceding slump. Safe-haven demand was in evidence during March, with trading volumes in the SGE’s Au(T+D) contract reaching a record high, while Chinese gold-backed ETFs jumped by 4.6t.
Bar and coin investment in India fell 17% y-o-y to 28t – its lowest level for four years. Having fallen prey to soaring – and volatile – local gold prices in January and February, the lockdown imposed in March effectively brought retail investment to a halt. Availability of bars and coins became problematic after the gradual closure of retail shops and bullion dealers from 17 March onwards, and was non-existent after the complete lockdown that began on 25 March. The discount in the local market price clearly shows the impact of the lockdown – widening out sharply to as much as US$70/oz before ending the quarter around US$40/oz.
Interest in digital gold products – a trend we noted last quarter – continued to grow in Q1, as it was obviously easier to buy gold via such platforms. This echoed the rise in demand for ETFs in India, which saw relatively sizable inflows of 4.4t as investors rushed to meet their safe-haven needs.
Thailand was one of the weakest markets in the east Asian region: bar and coin investment slumped by 73% y-o-y to just 5.7t. The contraction was due to a combination of lower levels of gross buying and a fresh wave of selling back. The paltry Q1 total follows on from a very weak H2 2019, when high gold prices and a weak economic environment, had encouraged a sharp wave of recycling. The motivations remained the same in Q1, as the gold price made strong gains and Thailand’s economy remained fragile and susceptible to the negative impacts of a strong currency.
And this pattern continued into April. Reports of heavy distress selling emerged during the first weeks of Q2 as the gold price rallied to a seven-year high, encouraging investors to cash in as they try to ease the economic strain caused by COVID-19. The move prompted Thailand’s Prime Minister to urge people to sell ‘gradually’ to avoid a liquidity crunch.
Japan notched up a fifth consecutive quarter of negative retail investment: selling outweighed new investment by 6.5t. This represents the longest unbroken stretch of net disinvestment in Japan since the global financial crisis.
Bar and coin demand across the Middle Eastern region was generally resilient as investors were quick to respond to the sharp pullback in the gold price during March. But virus-hit Iran was a notable outlier: retail investment dropped by 21% y-o-y to 8.9t. The decline is partly due to a high base effect as it is measured against Q1 2019 – a strong quarter. But distress selling contributed to the decline; as the virus took hold here ahead of other countries in the region, incomes suffered.
Retail investors in Turkey flooded into gold as a safe haven, pushing bar and coin demand up 27% y-o-y to 21.2t. Investors were also attracted into the market on expectations of continued strength in local gold prices.
Q1 bar and coin investment in the US more than doubled y-o-y to a three-year high of 14.9t. After bouts of selling back in January and February, March saw a dramatic surge in net buying as safe-haven motivations came to the fore amid the coronavirus outbreak and stock market volatility. Combined sales of Eagle and Buffalo coins, reported by the US Mint, jumped 130% y-o-y and sales have remained strong into Q2.
Europe also saw the highest levels of retail investment since Q1 2017: demand across the region was up by 53% y-o-y to 65.1t. Demand in the UK reached a record high for our series of 6.6t, as coronavirus-inspired safe-haven buying added to Brexit-fuelled investment.