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Asia demand for ETFs increase as global demand levels off

Friday, 11 September 2020


The World Gold Council has released data showing gold ETFs saw inflows for the ninth consecutive month in August, albeit at the slowest pace for 2020. Collectively, gold ETFs added 39 t during the month, equivalent to US$2.1 billion or 0.9% of assets under management (AUM) as the price of gold reached a record high of US$2067 early in August. As equities continued to climb to new all-time highs, interest rates rose and yield curves steepened, investor positioning in the gold market consolidated later in the month and the gold price ended the month slightly lower (- 0.38% or US$1957/oz) for the first time in 5 months.


Year-to-date global net inflows of 938 t (US$51.2 billion) have taken collective gold ETF holdings to a fresh new all-time high of (3824 t) and AUM (US$241 billion).

Regional overview


Strong inflows continued in North America as holdings increased by 41 t (US$2.5 billion, 1.9% AUM), with all 16 funds listed in the region growing in August. There was a meaningful increase in Asian-listed gold ETF assets of 7 t (US$459 million, 6.5% AUM) driven by investor appetite and new funds launched in the region.


Two new Chinese funds joined the Asian gold ETF regional universe. In India, Nippon India Mutual launched a multi-asset fund in August that will partially invest in gold ETFs and gold derivatives. While this fund does not qualify as a gold-backed ETF by the council’s definition, it is an example of the growth of the gold ETF market in India. Funds listed in other regions experienced modest inflows of 1.9 t (US$108 million, 2.7% AUM).

European funds had net outflows of 11 t (US$937 million, 0.9% AUM) for the first time since November 2019, driven by outflows from German-based gold-ETFs. A stronger euro, which has appreciated 9% against the US dollar over the past 4 months, along with improving investor sentiment in the region could have also played a role in the outflows.

Liquidity and positioning suggest increased strategic investment


The gold price hit an all-time high early in August on higher trading volume, but remains well below the inflation-adjusted, all-time high of US$2800/oz. Volumes rose once again to US$235 billion/d. At the same time, broad market stock volumes fell meaningfully during the month. As an example, the most liquid, broad-market stock index ETF in the US traded 50% below its 2020 daily average volume during the month. The Commitment of Traders (COT) report for COMEX gold futures quantifies speculative positioning in the futures market, which can sometimes serve as a contrary indicator at extreme bullish or bearish levels. But this year the net long position peaked in February at 1209 t (US$63 billion), and has subsided meaningfully to 778 t in August (US$49 billion) despite gold pushing up to new highs. The World Gold Council believes that an increased cost of ownership on gold positions held via COMEX gold futures has deterred participation in this market, reducing the usefulness of COT analysis.

Low rate expectations, and higher inflation allowances could bode well for gold prices


Late in the month, Federal (Fed) Chairman Jerome Powell announced a major shift in US Fed Reserve policy. The US will no longer pre-emptively increase rates to cool higher inflation, suggesting that rates could remain near zero for many years. This monetary policy philosophy may trickle into other regions and may keep negative real rates prevalent across most the globe for a long time. Late in the month, the ECB went as far to say that their negative rate policy has been successful so far, also suggesting their policies could remain for the foreseeable future. In turn, asset allocation strategies may need to be re-evaluated.


One of the four key drivers of gold demand relates to gold’s attractiveness — or opportunity cost — relative to other assets. Gold does not pay a dividend or coupon like stocks and bonds because it carries no counterparty risk, which may deter some investors. However, this potential headwind largely dissipates in the current rate environment. Real rates in all developed countries are all effectively in negative territory, which should keep the opportunity cost of gold lower for longer. Also, the shift to allowing higher inflation could help gold pricing as well. Gold is seen as a well-established global inflation hedge, historically achieving stronger returns in higher inflationary markets. In the US, for example, since 1971, the nominal returns of gold with CPI levels below 3% have averaged nearly 6%, while returns in inflation environments above 3% have averaged 15%.

Looking aheadFrom a technical perspective, the overbought conditions discussed earlier in August have largely subsided with the relative strength index (RSI) – a common metric for gauging momentum – falling from extreme levels near 90, to levels closer to 50, usually seen as a more neutral level. The gold price also appears to be forming a technical base above US$1900/oz, which could act as support for a potential leg higher in the price.


The disconnect between economic and geopolitical data and risky assets like stocks remains. Technology companies in the US have reached valuation levels last seen during the tech bubble in the early 2000s. The market capitalisation of Apple, for instance, eclipsed the entire FTSE Index in Europe and the Russell 2000 in the US. Tesla became the seventh largest company in the US, just behind Berkshire Hathaway. And many stock indices in Europe have turned positive on the year with improving sentiment in the region. At the same time, both investment grade and high yield corporate debt has reached all-time levels with central bank support. As noted in the World Gold Council’s recent Gold Demand Trends: 2Q20 and July ETF report, economic weakness has significantly hurt jewellery, bar and coin, and technology demand, which have averaged 86% of total gold demand over the past 10 years. But the combination of high risk, low rates and positive momentum appear to be more than offsetting the shortfall driven by economic weakness. With the recent demand shift, only 32% of demand came from jewellery, bar and coin and technology in 2Q20, with the remainder coming from investments – like gold ETFs – and central banks.


In it's Gold Mid-Year Outlook, the Council noted a growing consensus that the V-shaped recovery may be morphing into a U-shaped recovery, or that more of a W-shaped recovery could be experienced amidst subsequent waves of infections. At present, COVID cases appear to be resurfacing, not just in the US but in other countries that had earlier appeared to contain the outbreak. The ultimate effect of this is still very much unknown.