Global gold-backed ETFs saw the first quarterly outflows since Q4 2016: AUM fell by 103.2t over the quarter. This represents a 116t decline when compared with inflows of 13.2t in the same period last year. While flows decelerated towards the end of the quarter, September nonetheless was the fourth consecutive month of outflows, creating the longest period of monthly outflows since 2014. This wiped out gains made earlier in the year: by the end of Q3, global gold-backed ETFs had shed 42t. The trend in October, however, seemed to have reversed as ETFs have generally seen positive flows across regions.
The overall decline masks notable regional differences. North America, home to the largest and most liquid gold-backed ETFs, accounted for 73% of outflows in Q3 (around 75t) and almost 90% of outflows over the course of the year so far.
This bearish sentiment towards gold was also present in the US futures market with COMEX reported managed money net longs falling to the lowest level since 2006 and speculative net long positioning turning negative for the first time since 2001.
This is largely because of the positive macroeconomic backdrop in the US. Equity markets performed well, with the S&P500, Dow Jones and Nasdaq all hitting record highs in Q3. The economy is motoring, inflation is edging up and the Federal Reserve is expected to continue tightening monetary conditions. And after the low levels of Q1, the US dollar has rebounded and remained relatively strong since. US investors have, by and large, shrugged off concerns around escalating trade war tensions.
The outflows were also momentum-driven. The US dollar gold price lost 3% in the first half of August, a downturn exacerbated when it breached US$1,200/oz – an important technical support level – for the first time since early 2017.
Outflows from European-listed funds in Q3 were more modest at 14t. The quarter was quiet, with limited investor activity. Italian budget concerns and trade war rhetoric failed to stimulate safe-haven flows. The y-t-d picture, however, is more positive: European-listed funds gained 37.7t to the end of Q3.
The contrasting 2018 fortunes of North American- and European-listed ETFs reflect a longer-term trend. European-listed funds have accounted for an increasing share of the global market in recent years. The US market developed rapidly in the early 2000s, both in terms of the number of gold-backed ETFs and AUM, whereas it took the global financial crisis and subsequent euro area crisis to catalyse the development of the European gold-backed ETF market. Recent political uncertainty, and negative yields on both European sovereign debt and highly-rated corporate bonds, have created an environment for the European gold-backed ETF market to thrive. For more information on the development of this market, please see our Market Update: German investment market, which shines a spotlight on the development of the gold-backed ETF and bar and coin market.
China-listed ETFs also saw outflows in Q3, losing 12.2t over the quarter, equivalent to 20% of Chinese AUM. China’s ETFs attract a more speculative investor type, resulting in a relatively high degree of volatility in ETF flows compared to other regions.
Bars and coins
Global bar and coin demand bounced back in Q3 to 298.1t, rising 28% y-o-y and 20% q-o-q. Growth was geographically diverse, with gains in most markets. Three key factors encouraged retail investors to add gold to their portfolios:
- A price drop in many markets created a buying opportunity
- Steep losses on many emerging market stock exchanges spurred a flight to safety
- Concerns about further currency weakness prompted investors in some markets to turn to gold
The world’s largest bar and coin market saw significant growth. Demand in China shot up 25% y-o-y and q-o-q to reach 86.5t in Q3, comfortably above its three- and five-year quarterly average of 71.4t and 65t respectively.
Investors flocked to gold in Q3 against a backdrop of financial vulnerability. Domestic equities and bonds have suffered in 2018 as trade war tensions have escalated. The CSI 300, China’s leading equity index, dropped 15% to the end of September, and the credit spread between AA+ corporate bonds and the quasi-sovereign China Development Bank bond ballooned to almost 190bps over the same period, highlighting concerns about prospects for domestic companies.
The quarter’s price dip proved a good buying opportunity. In August, the Shanghai Gold Exchange benchmark gold price dropped to RMB262/g, its lowest level since 2016. Interestingly, commercial banks’ gold bar and coin sales performed relatively well, indicating strong demand from the mass retail market.
Demand in India was encouraged by lower prices and equity weakness. India’s bar and coin demand picked up in Q3 to reach 34.4t, but remains below its three-year average of 43.3t. August was the strongest month of the quarter as the domestic gold price fell below Rs29,700/10g, dropping to its lowest 2018 level.
The bar and coin market is predominantly the preserve of the urban India investor – rural investors typically invest in 22ct jewellery.1 Urban investors are more likely to hold a well-diversified portfolio and, for them, equity market volatility created an unsettling backdrop. In September the BSE Senex fell 6% and has continued to tumble in October, supporting demand for bars and coins.
The picture was similar elsewhere in Asia. A fall in the gold price, tumbling equity markets and depreciating currencies in Vietnam, Thailand, Indonesia and Malaysia boosted bar and coin demand. But other country specific factors were in play. Malaysia benefited from the removal of 6% GST and rumours remained rife in the Thai market that the government may follow India’s lead and clamp down on unaccounted money.
The Middle East bar and coin market has continued its recent up trend, rising 144% y-o-y and 28% q-o-q. Demand reached 27.8t, its highest level since Q2 2013, a period when demand spiked in response to a sharp fall in the gold price.
Recent positive momentum continued in Iran in Q3. Demand hit 21.1t - the highest since Q2 2013 – and accounted for three-quarters of the Middle East market. Renewed sanctions and the plummeting rial – with expectations for it to fall further – underpinned this flight to gold. VAT-free bars and coins were preferred over jewellery, which is subject to 9% tax.
Bar and coin demand in Turkey reacted differently to the mix of financial insecurity and currency weakness. As the Turkish lira gold price rose in August to a record high of TL273/g, investors liquidated some of their bar and coin holdings to book profits. Net new buying fell to 4.6t, a 69% drop on the same period last year.
European demand was 51.1t, up 10% y-o-y. Germany – which accounts for more than half of the region’s bar and coin investment – was up 10% to 28.4t. In late September the euro-denominated gold price fell to a two-and-a-half year low of €32,638/kg. Unlike the European-ETF market, concerns around Italian debt and its potential to spark a broader financial crisis, prompted safe-haven buying among retail investors.
Having been in the doldrums for several quarters, the US bar and coin market showed signs of life. Demand reached double-digits – 10.5t, up 74% y-o-y. Growth was largely fuelled by bargain hunting in June, when the gold price dropped from more than US$1,300/oz to close on US$1,250/oz.