Investors rush back to gold ETFs amid inflation data surprise

May 19th, 2021 | By | Category: Commodities

After outflows in recent months, gold ETFs are enjoying a surge in demand as investors seek to fortify their portfolios against the risks of rising inflation and a more subdued economic recovery from the Covid-19 pandemic.

Investors rush back to gold ETFs after inflation data surprise

Investors are showing renewed interest in gold ETFs amid rising inflationary concerns.

Gold ETFs recorded worldwide net inflows of $776 million (13.1 tonnes; +0.4% AUM) in the week ending 14 May, according to data from the World Gold Council.

Demand was particularly strong in Europe where gold ETFs attracted $659m in net new assets, while US gold ETFs also saw notable interest with $263m net inflows. In contrast, gold ETFs domiciled in the Asia Pacific region experienced net outflows of $118m.

The spike in gold demand marks a significant change in trend with gold ETFs previously seeing net redemptions in five of the past six months and just modest inflows in January.

John Reade, Chief Market Strategist at the World Gold Council, said: “We believe investors started to cut gold holdings in November last year following signs that vaccines would soon start to end the Covid-19 pandemic. This profit-taking, as investors moved to increase riskier assets, weighed upon gold but may have run its course.”

The renewed interest in gold coincides with a US Labor Department report last week showing that the consumer price index (CPI), a measure of inflation in the economy, rose 4.2% in the year through April, its largest increase since September 2008.

Inflation had already been a rising concern for investors as evidenced by the widening difference between ten-year and two-year Treasury yields – as inflation erodes the real value of bonds’ fixed payments, higher inflation expectations lead investors to push up yields on longer-term bonds as compensation.

Increased fiscal spending under the Biden administration, ongoing monetary stimulus, and the Federal Reserve’s declared willingness to allow inflation to overshoot its target all pointed to a growing need for investors to consider incorporating inflation-protection measures within their portfolios.

However, the magnitude of the CPI increase appears to have caught many investors off-guard triggering a notable shift into inflation-protecting assets.

In the US, the $62bn SPDR Gold Shares (GLD US), the world’s largest gold ETF, has picked up the majority of the inflows, attracting $850m net new assets month-to-date. In Europe, the $13.6bn Invesco Physical Gold ETC (SGLD LN) and $14.2bn iShares Physical Gold ETC (IGLN LN) have also seen pronounced demand, pulling in $240m and $190m respectively.

Meanwhile, the $28.1bn iShares TIPS Bond ETF (TIP US), the world’s largest ETF providing exposure to Treasury Inflation-Protected Securities, has seen bumper net inflows of $890m, putting it on track to record one of its largest monthly inflows over the past year.

The worrying inflation data also arrived at the same time as a painfully disappointing jobs report showed unemployment increased in the US in April for the first time in months. The combination of higher inflation and weaker job growth presents a tricky situation for the Federal Reserve which aims to balance the dual goals of stable prices and high employment.

Reade noted: “Last week’s much stronger than expected US inflation data, along with underwhelming jobs numbers and soggy retail sales, have raised the spectre of a difficult dilemma for the Federal Reserve. It remains to be seen if Chair Powell can ignore transient inflationary pressures and remain focused on the spare capacity in the US economy.

In this environment, gold appears poised to flourish. The price of bullion rose significantly in April and has accelerated in May to trade above $1870/oz, its highest level since January.

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