LAWRIE WILLIAMS: Gold ETF holdings near record highs. Very positive.

While sales of gold coins and gold bullion in the U.S. seems to be distinctly lacklustre. Investment in gold ETFs is, according to the World Gold Council (WGC) in its latest update on global ETF flows.  The WGC says the volumes flowing ito these ETFs are running at near record highs, stimulated by the rising gold price and the consensus view that the gold price’s future path is upwards.  This is a view we would concur with as there are many factors which appear to be working in gold’s favour – not least likely interest rate hikes implemented by the U.S. Federal Reserve in the final months of the year supported by an apparent downturn in the global economy and seemingly ever-increasing geopolitical tensions.

According to the WGC August saw global gold-backed ETFs and similar products generating net global inflows valued at US$6.0 billion.  This led to such collective gold holdings seeing an increase of 122 tonnes to total 2,733 tonnes. The WGC thus estimates such total holdings as only around 59 tonnes (or 2%) light of the all-time high of 2,791 tonnes, which occurred in late 2012 when the price of gold was some 10% higher at an average of about $1,665 an ounce.

There are still doubters out there suggesting that the gold ETFs do not actually hold the physical gold they report, and they view the WGC as complicit in misleading investors accordingly as the development of the gold ETF was very much a WGC initiative.  However we are strong believers that the gold ETF figures are genuine.  We would point out further that some of the biggest institutions are major holders of gold ETFs and given their extensive due diligence capabilities it is extremely unlikely that they would invest in fraudulent funds.

The WGC goes on to note in its ETF update that more broadly, gold-backed ETFs have added 13% to their holdings over the past three months driven mainly by the decrease in global rates that has led to a slight yield curve inversion in the US 2y/10y Treasury curve—an inverted curve has historically preceded recessions, as well as continuing geopolitical tensions between the US and China. As the gold price in US dollars increased by an additional 7% in August, global assets under management (AUM) rose 12% to $134 billion. North American funds led August’s flows into ETFs, adding 78 tonnes ($3.8 billion, 5.5% of AUM), now surpassing Europe as the region with the most inflows so far in 2019. Inflows were driven primarily by SPDR Gold Shares (GLD) with inflows of 55 tonnes, equivalent to $2.7 billion or 7%  - since the end of August GLD has added another 11 tonnes - and iShares Gold Trust (IAU) which added 18 tonnes - $897 million or 6.4%.

Low-cost gold-backed ETFs continued to grow, says the WGC, accumulating 2.3 tonnes during August, bringing their joint holdings to an all-time high of 58 tonnes, worth US$2.8 billion. European-listed funds brought in 33 tonnes or $1.7 billion (2.8%), mainly via the UK as the pound continued to weaken and the probability of a “No-deal Brexit” became more likely.

The WGC noted also that Germany auctioned the first-ever 30-yr negative nominal yielding bond pointing out that this highlights the impact rates are having on the price of gold, improving its opportunity cost of holding as its price in Euros reached all-time highs.

Funds in Asia reversed year-to-date outflows, adding 9 tonnes ($468 million, 12%). Chinese funds drove inflows, as average daily gold trading volume on the Shanghai Futures Exchange (SHFE) increased to over $20 billion, well above the year-to-date average of $8 billion and the 2018 average of $3 billion. Trading volume of Au(T+D)—the margin-traded gold contract on the Shanghai Gold Exchange (SGE) reached 2,507 tonnes in August, the highest in its history.

From a currency perspective, the US dollar closed August near year-to-date highs, despite what might be seen as deteriorating economic conditions and the market implications of additional Fed rate cuts this year. Recently the dollar index has come back a point but is still looking strong.  A strong dollar is usually a negative factor for the gold price, which is seen as a bellwether for the U.S. currency, but in late August, ahead of the U.S. Labor Day holiday, gold continued to rise despite the strength in the dollar index.  Conversely, the gold price has fallen back almost $50 in the past week despite the dollar index also coming down a little. 

Gold reached all-time highs in August, notes the WGC, in every major G10 currency except the U.S. dollar and Swiss franc. It also got close to a high in Chinese renminbi.

The WGC commentary also pointed to some interesting additional statistics on global gold trade.  Positioning through futures net longs in COMEX closed the month at all-time highs of 1,124 tonnes. Global gold trade volumes continued to surge and averaged $219 billion a day – 92% above their 2018 levels – through over-the-counter products, futures contracts and ETFs. Implied and realised volatility trended higher and remain at three-year highs and put/call skew remains at extreme levels which suggests investors were willing to pay more for the option to buy gold in the future than to sell – highlighting continued bullish sentiment.

Altogether, the WGC’s ETF analysis, if the inflows are sustained, demonstrates yet another positive development for the gold price’s future. The figures do suggest something of a turnaround in investment sentiment from institutional investors and funds, which had been shy of investing in precious metals. but they now seem to be back in force!. 

U.S. equity markets, although comfortably underperforming the precious metals over the past year, remain resilient though with occasional sharp falls being quickly erased.  While equity investment takes money away from potential precious metals monetary inflows, the WGC statistics demonstrate that gold investment in particular is, at long last, making some inroads into the investment psyche. 

We are convinced that U.S. equities in particular are exceedingly vulnerable to a mega-collapse (which would likely also adversely affect global equities).  This would likely be led down by a tech stock implosion and gold and silver bullion and gold and silver mining stocks may present the best way ahead for the investor to ride out any such forthcoming storm.  In the words of Michael Lewitt, writer/publisher of the hugely insightful Credit Strategist newsletter, “Buy gold and save yourselves!”  We have highlighted his advice before, but have no hesitation in doing so again.  General equities look very vulnerable, but gold, in particular offers limited downside in comparison.  It is the true safe haven investment.

08 Sep 2019

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com