UNITED KINGDOM August 04 2017 6:09 PM
LONDON (Scrap Register): Investors continued to buy gold-backed ETFs in Q2: global AUM grew by 56 tons. By the end of June, holdings of ETFs had reached 2,313t (worth US$92.4bn), the highest month-end total since October last year. H1 holdings were up by 167.9t, according to the World Gold Council.
And while this pales in comparison with last year’s record growth, it nonetheless signals a continued interest in gold investment among institutional investors.
After 10 months of unhindered inflows in 2016, investment in gold-backed ETFs during the first half of 2017 have been rather more erratic. Of the main – sometimes conflicting – factors that influenced investor attitudes towards gold-backed ETFs, the three that seemed to dominate Q2 were:
--Monetary policy ‘normalisation’
Monetary policy was again front of mind during the quarter as the Federal Reserve raised rates in June and ECB President Draghi signalled possible tightening in Europe as deflationary pressures start to reverse. The prospect of continued, if modest, monetary tightening dampened ETF demand.
Rising interest rates are usually interpreted as being negative for gold. But the Federal Reserve continues to telegraph its plans for monetary policy clearly, and – since the end of Q2 – market expectations of a third US rate hike have subsequently been pushed out to Q1 2018. This gives investors ample time to adjust positioning, so we believe that gold should not come under undue pressure as the timing of a likely rate rise approaches.
The gold price rose by 8% during the first half of 2017, building on the 8% gains seen during 2016. This led to some investors taking a more cautious approach, reluctant to build positions after a strong price move. Others used it as an opportunity to take profits. Although lower prices may encourage fresh buying, anecdotal reports suggest that investment in Q2 was not generally driven by investors’ expectations of strong near-term capital appreciation.
Event risk, particularly surrounding geopolitical tension, remained a key driver of demand for ETFs. Across Western markets investors were attracted by gold’s properties as an insurance asset. The environment created by sporadic global terrorist incidents, tension between the US and North Korea, and the shock sacking of FBI Director Comey, left investors keenly aware of the risk of unexpected, destabilising events, and this underpinned an element of gold-backed ETF inflows.
Investment in the US and Europe was quite evenly matched in Q2, with inflows of 30.9t and 35.2t respectively. But it is European investors who dominate the H1 picture: ETFs listed in the region grew by 128t in the first half of 2017, absorbing 76% of net global inflows.
After a strong Q1, those inflows slowed markedly in Q2, although demand on the continent was firm, with little interest in outright selling. The region’s geopolitical climate settled somewhat after the election of French President Macron. Negative bond yields in Germany – home to the largest European-based fund, Xetra-Gold – continued to drive investment into domestic funds, albeit to a lesser extent than in Q1, as they recovered from the record lows seen in March.
Anxiety caused by the UK election was largely confined to the domestic market, where Source Physical Gold ETF saw the biggest increase in holdings. The bulk of the 12.2t inflow was concentrated at the end of June, coinciding with the sharp drop in the Sterling gold price.
AUM in European-listed funds have grown sharply over the last 18 months. Tonnage grew from 570.2t at end-2015 to a new all-time high of 977.7t at the end of Q2, exceeding the previous peak of 960.1t from 2012.