Gold ETFs prosper as price flirts with $2,000/oz mark

Jul 30th, 2020 | By | Category: Commodities

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ETFs providing exposure to gold are prospering from strong returns and record inflows as investor nerves spur gold allocation increases, pushing the price of the metal to record highs.

Gold ETFs prosper as bullion approaches $2,000

ETFs providing exposure to gold have gained roughly 28% year-to-date.

Gold has gained roughly 28% year-to-date and recently surpassed its previous all-time high of $1,891 an ounce, set in September 2011.

As of 30 July 2020, an ounce of gold was trading around the $1,950 mark, setting the $2,000 milestone firmly in its sights.

ETP flows

According to data from the World Gold Council, inflows into gold-backed ETPs in the first half of 2020 surpassed any previous full calendar year and total assets under management in these products hit a record $205.8bn.

Looking at flows in the most recent full quarter (April to June), gold ETPs listed in North America accounted for three-quarters of flows globally, pulling in roughly $18bn in net new assets. The two largest gold ETPs in the region – the SPDR Gold Shares (GLD US) and iShares Gold Trust (IAU US) – attracted flows of $11.6bn and $3.5bn respectively, in the quarter.

Steady, persistent inflows (GLD has added a further $3.75bn so far in July) and strong returns have pushed AUM in the SPDR Gold Shares – the largest gold ETP globally – to a new all-time high of $77.9bn, surpassing its previous record set in October 2012.

SPDR Gold Shares (GLD US) AUM

Europe-listed gold ETPs saw inflows of $4.4bn during Q2 with the region’s growth being heavily concentrated in UK-listed funds which gathered $2.9bn. Interestingly, strong demand in April and May was partly offset by small outflows in June.

The largest gold ETPs accounted for the bulk of inflows with the $14.9bn iShares Physical Gold ETC (IGLN LN), $14.3bn Xetra Gold ETC (4GLD GY), and $13.4bn Invesco Physical Gold ETC (SGLD LN) attracting $1.8bn, $0.7bn, and $0.9bn, respectively.

Demand drivers

Demand for gold has picked up significantly this year as investors, of all stripes, from retail investors right through to sovereign institutions, have sought safe-haven assets to bolster their portfolios from the negative economic consequences of the coronavirus pandemic.

Gold has benefitted also from the drastic monetary stimulus it has sparked, such as the slashing of interest rates to record lows and the ramping up of quantitative easing programs that have caused real yields to fall.

The yield on the 10-year US Treasury Note is down from 1.87% at the start of 2020 to just 0.57%, while the list of countries with negative-yielding government debt this year has grown considerably to include Japan, Germany, the UK, France, Switzerland, the Netherlands, Sweden, and Denmark.

Falling yields help to boost the relative value of non-income-producing assets such as gold. This is especially true in relation to US Treasuries which historically has competed with gold as a safe-haven asset.

Monetary stimulus in the US has also renewed investors’ concerns over inflation, while an underperforming economy and a rising debt load have contributed to US dollar weakness. The US Dollar Index, which tracks the greenback’s performance relative to a basket of major currencies, recently touched upon a two-year low. US dollar weakness is further bullish for gold as it makes the yellow metal cheaper for foreign investors.

According to George Milling-Stanley, Chief Gold Strategist at State Street Global Advisors, the seeds of the current gold rally were, however, being sown well before the coronavirus pandemic, indicating that gold may continue its upwards trajectory even if a vaccine is made available in the near-term.

“Gold was already going up before we ever heard words like global emergency, pandemic, lockdown, and the like,” said Milling-Stanley. “This time last year, gold broke out above its trading range that had capped the price at $1,350 for six years from June 2013 to June 2019. By February of this year, the price was already more than $200 above the previous ceiling.

“Upward momentum had been building based on the following macroeconomic concerns: that the US stock market might be overdue for a correction after 11 straight years of gains, that a recession might be due after the first decade in the history of the US that did not feature one, that interest rates were at historically low levels, and that government debt was at $23 trillion and increasing by $1 trillion a year.

“Covid-19 has made all these concerns even greater, especially as many parts of the US, and other countries around the world, are experiencing difficulties in reopening from lengthy periods of lockdown, leading to growing concerns over the economic outlook. This has triggered significant safe-haven buying of gold, while ETFs, led by the undoubted market leader GLD, have benefited.

“Gold has very low statistically significant relationships with the other assets one might expect to find in a typical portfolio. Gold also has thousands of years of track record in offering some protection against the unexpected, whether the tail risk is macroeconomic or geopolitical in nature. There can be no question that gold ETFs have established themselves as a relatively friction-free means of gaining exposure to movements in the gold price.”

Increasing momentum

The price momentum behind gold shows little signs of abating with the precious metal currently having chalked up a nine-day rally.

Some analysts have attributed this recent success to the psychological effect of the gold price reaching new highs, while others point to comments from Federal Reserve Chairman Jerome Powell that indicated the US central bank remains committed to doing whatever it takes to combat the virus’s economic impact.

Indeed, Goldman Sachs recently referenced the continual decline of real interest rates in the US as the biggest influence on its decision to raise its 12-month gold price forecast from $2,000 to $2,300 an ounce.

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