Global gold-backed ETFs saw another quarter of muted growth: inflows of 33.8t were considerably lower than the 62.5t increase during Q2 2017. H1 inflows of 63t were the lowest since the first half of 2015, despite mounting global trade tensions and relatively volatile stock markets. By the end of H1, global holdings stood at 2,434.3t. ETFs have seen steady but modest investment over the last four quarters, with holdings increasing by an average of 27.2t per quarter.
In something of a reversal of the Q1 trend, inflows in Q2 were directed towards European-listed funds while North American funds saw net outflows. Early in the year geopolitical concern (primarily surrounding tensions with North Korea) together with a weakening of the US dollar, made US investors skittish, driving investment into gold-backed ETFs. Around mid-April, these issues began to subside and the US economy showed continued improvement, taking the momentum out of US inflows. At the same time, Europe saw political instability escalate, and this – in conjunction with a marked depreciation of the euro – encouraged a flight to safety in European-listed gold-backed ETFs.
European funds have attracted the bulk of inflows into ETFs so far in 2018
GDT Q2 2018 - Investment - European funds chart
Source: Bloomberg; Company Filings; ICE Benchmark Administration;
European funds absorbed 53.2t of inflows and AUM in the region reached 1,052.7t by the end of the quarter. Inflows were up by 53% y-o-y. Y-t-d, European products have led the way, accounting for 83% of total global inflows during H1. Inflows were indicative of regional geo-political turbulence. Indecisive Italian elections led to protracted negotiations, finally culminating in the creation of a vocal populist coalition in June. Uncertainty over the direction of central bank policy was a further incentive for investors to seek refuge in gold-backed ETFs. But momentum was less than stellar as investors in the region lacked a clear signal from the euro-denominated price.
Healthy inflows into North American funds in April were followed by two months of strong outflows, resulting in the region seeing net Q2 outflows of 30.7t. This was in stark contrast to the 32.3t of inflows seen in Q2 2017. Investors seemed to shrug off poor equity market performance and the escalating trade conflict between the US and its major trading partners. Instead, the strengthening dollar, which contributed to the sharp decline in the US dollar gold price during Q2, weighed on sentiment. Y-t-d, North American funds are little changed: holdings are up by just 4.8t to 1,248.7t.
Asian funds saw further growth: an impressive 16.7t of inflows in Q2 took y-t-d inflows to 10.8t. China’s Bosera Gold open-ended ETF continued to grow, aided in part by the unwinding of Bosera’s unlisted funds (I and D Shares), and has leapfrogged Huaan Yifu to become China’s largest gold-backed ETF with holdings of 30.9t (as at end Q2). Holdings in Asian-listed ETFs as a group have grown 13% y-t-d to 95.6t, primarily due to growth in China.
Bar and coin
The global bar and coin market remained subdued in Q2 2018. Demand was flat y-o-y at 247.6t and, at the halfway stage of the year, is bang in line with the three-year average: 509.1t in H1 2018 compared to the H1 average of 508.6t from 2015 to 2017.
Price dips often tease out an investor response, but, for many markets, the 5.5% fall in the US dollar gold price over the quarter failed to translate into buying opportunities because of local currency weakness. Investor concerns over currency depreciation were, however, a driver of demand in some markets, most notably China and Iran.
China, the world’s largest bar and coin market, saw demand rise 11% to 69.5t as gold benefited from a flight to safety amidst increasingly tense trade-war rhetoric. The yuan weakened drastically against the US dollar, falling 5% over the quarter. And the stock market slumped: the Shanghai Stock Composite index dropped 14% in the first six months of the year. The y-o-y rise was from a relatively soft quarter in Q2 2017. Bar and coin demand has held in a relatively steady range over the last five quarters, hovering between 60 and 80 tonnes.
There were some important policy developments in China too. In a move to increase market transparency and boost investor protection, the People’s Bank of China (PBOC) announced draft regulations concerning the risk management practices of businesses which sell gold investment products over the internet, as well as the management of gold accumulation plans and gold asset management businesses. These draft regulations would provide the PBOC greater oversight of vaulted gold products – such as gold accumulation plans – and stronger investor protection. For example, a vaulted-gold product must have its gold kept at Shanghai Gold Exchange-approved vaults or the vault of a PBOC-approved financial institution.
China bar and coin investment: 11% growth in Q2 fuelled by currency and stock market weakness
GDT Q2 2018 - Investment - Chart China bar and coin
Source: Metals Focus; GFMS, Thomson Reuters; World Gold Council
Despite a spurt of investor demand for coins around Akshaya Tritiya in April, demand in India fell 5% y-o-y to 39.3t. The government’s intense focus on unaccounted wealth continued to scare off some investors, while buoyant performance on the Bombay Stock Exchange Sensex –up 4% in the first six months of the year – was a significant draw for others, especially urban investors. But, more broadly, many investors viewed the local gold price as relatively expensive because of the recent rupee depreciation: the average rupee gold price in Q2 was 7.4% higher y-o-y and 2% higher q-o-q. The inauspicious period of Adhik Maas from 16 May to 13 June dampened activity further.
Demand in Thailand was flat y-o-y at 15.1t. The fall in the US dollar gold price was offset by a fall in the Thai baht leaving the domestic gold price trading in a narrow range over the quarter.
The Vietnamese gold market enjoyed a boost when the Ho Chi Minh stock index entered a bear market, falling 25% from its all-time high in late May. Bar and coin demand rose 7% to 9.5t.
Turkish demand suffered at the hands of a deteriorating economic outlook and a weak currency. Demand halved y-o-y and dropped 11% q-o-q as the Turkish lira gold price rose to a record high in late May, almost touching TRY202/g. Turkey’s briskly expanding economy and the threat of a weakening lira has created relatively buoyant bar and coin demand in recent quarters. Having bought into a rising gold price over the past 12 months, the recent leap higher off the back of a plummeting currency proved too much for many investors. Fresh buying activity fell in Q2 and, as explained in the supply section, recycling rose as investors locked in profits from gold’s price appreciation. The snap general election in June and the start of Ramadan dampened investor interest towards the end of the quarter.
By contrast, Iran’s weakening economy, growing sense of insecurity and a currency which has almost halved in value, boosted bar and coin demand. It shot up to 15.2t – a 200% increase y-o-y – to reach its highest quarterly level since Q1 2014. Coin demand was healthy as the Iranian central bank increased the amount of gold coins released to the market. Gold coins have performed well in recent quarters as, unlike gold jewellery, they do not attract 9% VAT.
Iranian bar and coin investment quadruples amid flight to safety
GDT Q2 2018 - Investment - Iranian bar and coin chart
Source: Metals Focus; GFMS, Thomson Reuters; World Gold Council
European bar and coin demand slipped 15% y-o-y to 33.5t. Germany, which accounts for the lion’s share of the European market, saw demand fall 9%. This combined with a relatively soft Q1 to produce the weakest H1 since 2008. Bullion dealers in the region noted that retail investors were less concerned than ETF investors about the impact of the Italian elections and European Central Bank interest rate rises, and that a gold price above €35k/kg for much of Q2 (due to euro weakness) was perceived as relatively expensive. Some dealers reported an upturn in activity as the euro-denominated price fell sharply towards the end of the quarter, but it was too little too late for Europe’s Q2 bar and coin demand estimate.
Having languished in recent quarters, the US market remained in the doldrums. Although demand rose 9%, this was solely a reflection of an extremely weak Q2 2017. With investment of just 11.3t, H1 2018 is the weakest start to the year since 2007. US bullion dealers have, however, reported that the secondary market remains buoyant, with healthy two-way activity. And towards the end of the quarter, when the US dollar gold price reached lows of US$1,250/oz, retail investors showed signs of interest once more.