LAWRIE WILLIAMS: Gold continues to flood into ETFs boosting price
If there’s one thing that demonstrates the complete turnaround in gold’s fortunes to regain its position as a prime asset class, and the investment view that the metal’s price will continue to advance, it’s the continuing flow of the yellow metal into the global gold ETF sector. The latest report out of the World Gold Council (WGC) on the gold ETF market, for example, comments that gold-backed ETFs recorded their seventh consecutive month of positive flows in June, adding 104 tonnes – equivalent to US$5.6 billion or 2.7% of assets under management (AUM). This, states the WGC, brings H1 global net inflows to 734 tonnes ($39.5 billion), significantly above the highest level of previous record annual inflows, both in tonnage terms (646 tonnes in 2009) and US-dollar value ($23 billion in 2016). Note this compares 6 month flows this year with previous record full year flows, which serves to emphasise quite how significant the latest figures are in terms of gold supply/demand fundamentals..
Given that some other aspects of gold demand this year may be severely adversely diminished due to the impact of the coronavirus on traditional retail gold markets (notably in China and in the global gold jewellery markets) – indeed may even be contributing to increased scrap gold sales due to the high metal price and diminished incomes – the sheer magnitude of the flows into the gold ETF sector has to be hugely significant. Central bank purchases too are also reckoned to be falling this year, particularly since Russia (previously the biggest purchaser of gold for its reserves) has withdrawn from the market as from April. However, increased demand from Turkey seems to be mitigating this apparent demand reduction which may not prove to be as great as feared overall.
Thus as the WGC points out further, the levels of H1 gold ETF inflows are also significantly higher than the multi-decade record level of central bank net purchases seen in 2018 and 2019, and will have absorbed about 45% of global new mined gold production in H1 2020. This is very much a game-changer in terms of current gold supply and demand.
Even so, at the beginning of June, when the gold price was brought down sharply, global gold ETFs registered three consecutive days of outflows – the first consecutive daily declines since March – before regaining momentum along with the again-rising gold price. All regions saw net inflows during the month, with North American funds accounting for the lion’s share. The ETF inflows have continued so far in July too, with GLD, by far the largest of the global gold ETFs, adding a further 17 tonnes in the first week of the month despite the American Independence Day holiday cutting into the latest demand data growth.
For the latest full month (June), the WGC noted in its report that global equities started out positively with investor optimism growing as economies around the world began to emerge from their respective lockdowns. U.S. stocks, in particular, were boosted by a jobs report that defied dire expectations and showed a fall in unemployment from 14.7% to 13.3%3. In Europe, the easing of strict lockdown restrictions in several economies gave investors further hope for a recovery in the global economy.
However, as the month progressed, this positive sentiment was replaced by concerns over increasing COVID-19 infection rates in various locations and the potential for a second wave. We have always commented that the recoveries seen in equities are hugely vulnerable to a sharp collapse as the investment public, which has been responsible for driving markets higher despite some of the biggest investment professionals steering well clear, begins to realise thatb the COVID-19 inspired recession will not end quickly – indeed may continue until well into 2021 and possibly beyond.
The WGC went on to note that despite the better-than-expected U.S. jobs report for May, and emerging signs of recovery in the U.S. economy following the COVID-19 lockdown, U.S. Federal Reserve Chairman Powell remained cautious, saying that the Fed is “…strongly committed to using our tools to do whatever we can for as long as it takes…”. While the potential for further accommodative monetary policy measures has been generally seen as positive for stocks, the cautious tone reinforced a more general risk-off sentiment, as many market participants started to shift expectations that any economic recovery will likely be more prolonged and slower than market optimists had been predicting. Of course accommodative monetary policies are also considered as positive for the gold price which has continued strong over the past few weeks, even as equity performance has been decidedly mixed.
The WGC also reckons that speculation over the potential impact of a possible second wave of COVID-19 infections on an already fragile global economy is causing a renewed wave of fear and uncertainty. Infections and deaths globally are still rising – they will probably reach 12 million and 550,000 respectively today. The U.S. alone is seeing current confirmed infections rising at over 50,000 a day and deaths of around 1,000 a day despite the President’s continued downplaying of the virus’s effects! None of this looks like positive news for the equities markets, although it is probably further boosting the safe haven appeal of gold.
Meanwhile, ongoing asset purchases by central banks to mitigate the impact of the pandemic have further reduced the opportunity cost of holding non-yielding assets such as gold as interest rates remain low to negative. These factors have helped continue to drive gold investment demand, with gold ETFs a key beneficiary of this momentum – a pattern which seems poised to continue until we see a realistic turnaround in the incidence of COVID-19 infections and deaths in the U.S. an d globally.
08 Jul 2020 | Categories: Gold