Rising rates weigh heavily on gold ETFs

Jul 11th, 2022 | By | Category: Commodities

Rising interest rates, the expectation for further aggressive monetary tightening, and a strengthening US dollar have caused the price of gold to slump and investors to make significant redemptions from gold-backed ETFs.

Gold ETFs record second consecutive month of outflows in June

Gold ETFs recorded their second consecutive month of net outflows in June.

As of 11 July, gold was trading around $1,740/oz., representing a 17.5% drop from its recent high of $2,044/oz. recorded on 7 March.

Despite geopolitical risks from the ongoing war in Ukraine, a gloomy economic outlook, and inflation running at decades-high levels, gold’s performance continues to be dampened by central bank action – non-interest-generating assets such as gold become relatively less attractive as interest rates rise.

At last month’s meeting, the Federal Reserve raised its key rate by three-quarters of a point (the biggest single increase in nearly three decades) to a range of 1.5% to 1.75% while also signaling that further hikes of a similar magnitude would likely be needed.

In Europe, the Bank of England notched its key rate up for the fifth time in a row to 1.25% in June. Further increases are widely expected as the central bank warns inflation could reach 11% in the UK this year. The European Central Bank, meanwhile, has indicated it will raise interest rates in July for the first time in more than 11 years.

US dollar strength has also contributed to decreased demand for gold from non-USD investors. The US Dollar Index (which measures the value of the US dollar relative to a basket of six top currencies: EUR, JPY, GBP, CHF, CAD, and SEK) has jumped 11.9% this year.

Amid this environment, investors have been pulling assets from gold-backed ETFs. According to data from the World Gold Council, gold ETFs globally registered 28 tonnes ($1.7 billion) of outflows in June. This was the second consecutive month of net redemptions for gold ETFs although the figure is somewhat lower than the 53t ($3.1bn) recorded in May.

Holdings in North America-listed gold ETFs fell by 26 tonnes ($1.5bn) in June with outflows dominated by the largest and most liquid funds such as the $57.2bn SPDR Gold Shares (GLD US) which knocked off 18t ($1bn, -2% AUM) and the $28.3bn iShares Gold Trust (IAU US) which lost 9t ($511 million, -2% AUM). Some low-cost gold ETFs, however, saw modest inflows such as the Goldman Sachs Physical Gold ETF (AAAU US) which gained 1t ($47m, 9% AUM).

Europe-listed gold ETFs experienced more modest outflows of 4t ($245m) in June, concentrated in funds from Switzerland, Germany, and France. Holdings in Asia-listed gold ETFs rose fractionally by 1t ($66.1m).

While quantitative tightening has come to dominate the narrative around gold investment, the World Gold Council notes that only a fraction of Q1’s inflows were unwound in Q2 with year-to-date net inflows remaining significantly positive at 234t ($14.8bn), potentially signaling that much of the gold demand is ‘sticky’ – more strategic in nature than tactical.

Looking ahead to H2, the World Gold Council notes that investors will likely continue to face a challenging environment of rising interest rates, high inflation, and geopolitical risks. The organization believes the gold price will likely remain sensitive to real rates, the speed at which global central banks tighten monetary policy, and their effectiveness in controlling inflation.

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