Interest rates will likely remain key drivers of financial assets. Gold is no exception. Yet, the negative impact of higher rates will likely be offset by the longer lasting effects and unintended consequences of expansionary monetary and fiscal policies created to support the global economy.
As the global economy emerges from an unprecedented shutdown, both policymakers and investors are operating in uncharted territory. To better understand investor strategies during this important transitional period, we interviewed approximately 500 institutional investors around the world about their portfolios, allocations and views on markets, gold and other individual asset classes.
This paper looks at the vulnerabilities specific to central bank balance sheets and discusses how gold holdings can mitigate the risks posed. In particular, it focuses on the way gold holdings can affect the revaluation reserves that form part of central bank equity.
Inflation fears and momentum ignite gold
Gold registered healthy positive returns for the second consecutive month, erasing the losses accumulated during Q1. Gold ended May at US$1,899.95/oz – its highest level since January and back above its 200-day moving average – representing a 7.5% m-o-m increase.
Global gold ETFs added 61.3t tonnes (t) (US$3.4bn, 1.7% AUM) in May, reversing three straight months of net outflows. We believe this to be largely a function of investment demand increasing with the price strength of gold, along with renewed inflation concerns in the market, a weaker dollar and lower real yields. Global assets under management (AUM) stand at 3,628t (US$222bn). AUM is now only 9% shy of the August 2020 high of US$240bn and 7% shy of the October 2020 tonnage high of 3,908t.
The volatility of numerous assets has shifted along with the performance of gold, which has recently rebounded to nearly flat on the year.
Global gold ETFs lost 18.3t tonnes (t) (-US$1.1bn, -0.5% AUM) in April, marking outflows for five of the past six months. However, global outflows slowed significantly, as European funds added assets for the first time since January. Global assets under management (AUM) stand at 3,567t (US$203.0bn), after slipping below $200bn for the first time in over a year during March. Since the peak asset levels in November 2020, gold ETF AUM has fallen nearly 14%, with 8% coming from outflows and 6% coming from the gold price selloff in US dollar terms.
Inflation, falling yields and the US dollar pushed gold higher
Marking a turnaround from the first three months of the year, gold rebounded 4.5% in April to finish the month at US$1,768/oz - its highest monthly closing level since January and its first positive monthly return since December 2020.
Strengthening consumer demand mitigated the impact of ETF outflows as global economies continued to recover
Gold has been at the heart of central banking for centuries. Once an official currency, it has become a cornerstone of modern reserve management. Emerging market central banks have been particularly active purchasers in recent years, and have occasionally acquired gold from local artisanal and small-scale producers.