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Gold ETFs added 21% in 2020

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Global Mining Review,

Gold-backed ETFs and similar products (gold ETFs) recorded their 8 consecutive month of positive flows, adding 166 t in July – equivalent to US$9.7 billion or 4.1% of assets under management (AUM). Global holdings have once again reached a new all-time high of 3785 t and the price of gold hit a record high of US$1976 / oz by the July-end, leaving global AUM standing at US$239 billion. Global net inflows of 899 t (US$49.1 billion) to date are considerably higher than previous annual highs, and the trend of inflows has continued in the first few trading days of August as the price of gold has breached US$2000 / oz.

Regional overview

While all regions had net inflows in July, North American funds, once again, led by a significant margin, accounting for 75% of global net inflows. The region added 118 t (US$7.0 billion, 5.5% AUM). European-listed funds added 40 t (US$2.1 billion, 2.1% AUM). Asian-listed fund holdings rose meaningfully during the month, by 4.9 t (US$370 million, 5.6% AUM). Funds listed in other regions registered a 3.4 t (US$218 million, 5.5% AUM) gain.

Conflicting messages between stock returns and economic indicators

Overall, July was notable for several ‘all-time’ records, including:

  • The S&P 500 reached a monthly closing high.
  • US 10-year yield finished at an all-time low of 0.53%.
  • The highly concentrated Nasdaq (with the top five companies representing 45% of the index) reached record levels, increasing 20% in 2020.
  • Silver had its strongest monthly performance ever, rallying 34%.
  • Gold reached its highs, rallying by 11% and, as of the end of July, is higher by nearly 30% on the year.

The rebound in China’s economy is reflected in the year to date return of the CSI300, which surged 14% in July. However, bullish sentiment is not as strong across many other regions, with stocks in Europe, Japan and EM remaining lower on the year.

Yet, economic numbers suggest a contrary environment to that reflected by equity markets and other risk-assets. Just last week GDP numbers in the US and Europe showed the sharpest seasonally and inflation-adjusted rate decreases annually on record (US: -33%, Europe: -40%). The q/q numbers are just as troublesome (US: -9.5%, Europe: -12%). Finally, while employment numbers improved in the US a few months ago, they have since reversed course as COVID cases have increased.

Can gold price strength continue?

The World Gold Council published two reports in late July addressing gold’s strength this year and some potential drivers for its direction in the near-term. Investment Update - Gold hits record high: sprint or marathon? highlights a number of important points. First, while the price of gold reached all-time highs in nominal terms, it remains below the inflation-adjusted record, which is US$2800 or 42% higher. Additionally, the Commitment of Traders (COT) report for gold COMEX futures often highlights speculative positioning, which can sometimes serve as a contrary indicator at extreme bullish or bearish levels. While bullish sentiment was at extreme levels in February 2020 at 1209 t (US$63 billion), it subsided meaningfully to 863 t in July (US$55 billion). Finally, on its blog Is gold ready for a pause technically? The council noted a few technical indicators that suggest gold could pause, at least in the short run.

Global gold trading volumes rose sharply to US$194 billion / d in July, up 24% from US$167.6 billion in June. Daily trading volumes remain below the year to date record of US$233 billion seen in March, but comfortably above the 2019 daily average of US$145.7 billion. Global gold futures interest spiked in July to US$120 billion, above the US$98 billion from June.

Looking ahead

The fundamental drivers of gold as being a function of economic expansion, risk and uncertainty, opportunity cost and momentum are often discussed. The current market environment highlights the multi-faceted nature of gold price behaviour. As we noted in our recent Gold Demand Trends: 2Q20, economic weakness has significantly hurt jewellery, bar and coin and technology demand, which have averaged 86% of total gold demand over the past 10 years. But geopolitical and economic uncertainty remains supportive for gold investment, and with real rates near or at all-time lows globally, the cost of holding gold remains low. Finally, investment demand and momentum appear to be more than offsetting the shortfall driven by economic weakness. With the recent demand shift, only 32% of demand came from jewellery, bar and coin and technology in 2Q20, with the remainder coming from investments – like gold ETFs – and central banks.

In its Mid-Year Outlook, the World Gold Council noted a growing consensus that the V-shaped recovery may be morphing into a U-shaped recovery, or that a W-shaped recovery could be experienced amidst subsequent waves of infections. At present, COVID cases appear to be resurfacing, not just in the US but in other countries that had earlier appeared to contain the outbreak. The ultimate effect of this is still very much unknown.

The true state of the economy may not be reflected in across all market environments. Record stimuli and easy money by central banks appear to have driven investments in equities higher, despite weak economic indicators. Ultimately, it could be the behaviour of central banks – with their continued expansionary monetary policy – that drives gold higher. This impact played key role in prompting the multi-year bull market in the price of gold following the Great Financial Crisis and subsequent Quantitative Easing.

Regional flows

  • North American funds had inflows of 118 t (US$7.0 billion, 5.5% AUM).
  • Holdings in European funds increased by 40 t (US$2.1 billion, 2.1% AUM).
  • Funds listed in Asia saw holdings rise by 4.9 t (US$370 million, 5.6% AUM).
  • Other regions had inflows of 3.4 t (US$218 million, 5.5% AUM).

Long-term trends

Ada, Perlaky, Manager Investment Research at World Gold Council, commented: "Looking ahead, though the shape of the recovery remains uncertain, we expect ongoing global economic uncertainty and low real rates to continue bolstering gold investment demand for the remainder of 2020."

  • Year to date gold ETF inflows have surpassed the largest annual gain of 646 t seen in 2009.
  • Over the 1H20 global gold ETF holdings (in tonnage terms) have increased by 31%.
  • Holdings in both tonnage and value terms continue to reach new highs North American and European funds now account for 52% and 43% of global tonnage holdings, respectively. The market shares from these two regions have been diverging since late March.
  • Low-cost gold-backed ETFs in the US now stand at 120 t (US$7.6 billion) in collective holdings, surpassing the entire Asian region.

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