Gold in ETF form attracts record levels of assets

Gold bullion

All-time highs have been experienced in gold-backed ETFs as a number of institutions reported record inflows on the back of the COVID-19 pandemic and the effect it has had on global financial markets.

The World Gold Council (WGC) reported holdings in gold-backed ETFs reached all-time highs over March, with net inflows up by 5 per cent (USD8.1 billion). March capped a record-breaking quarter, as gold ETF holdings and assets added USD 23 billion in net inflows, the largest quarterly gain in history. European funds led with AUM growth of USD4.4bn (5.8 per cent AUM).

The WGC reports that at the beginning of March, gold had outperformed most major asset classes so far in 2020, higher by over 7 per cent; and over the past year, gold ETFs have seen their highest yearly addition since the financial crisis, with assets under management increasing by 57 per cent.

North American funds added 4 per cent to assets (USD3.2 billion) and Asian funds, primarily in China, also finished the month with strong inflows, adding USD309 million (6.4 per cent AUM), while funds in other regions grew 9.4 per cent (USD249 million).

Gold global trading volumes averaged USD236 billion a day in March, an increase of 61 per cent year on year. 

One of the beneficiaries of the demand for gold in ETF form was Invesco, whose Physical Gold ETC hit USD10 billion in assets for the first time in its 10-year history, after record flows into the product in the first quarter of 2020. Since the start of the year, the Invesco ETC has grown 40 per cent in terms of the value of its assets, or 30 per cent without factoring in the increase in the gold price.

With over USD1.7 billion of net new assets in March alone, the ETC raised more in the month than any ETP in Europe, the firm says, and it is now the firm’s largest Europe-listed ETP.

Chris Mellor, Head of ETF Equity and Commodity Product Management at Invesco, says: “Investors are using ETCs to allocate to gold due to their liquidity and low costs – even at a time of abnormal market stress, record spreads, and when traditional physical trading routes and infrastructures are being restricted or even shut. Indeed, ETCs have weathered the quarter extremely well and delivered exceptional value for investors at a time of profound volatility and market disruption.

“Gold has been shown to be a safer store of value during the recent market turmoil than most other assets, and demand from investors has continued to grow. We expect this demand to continue in the foreseeable future as investors seek to capitalise on the benefits of ETCs to rebalance portfolios and reflect the market environment.”

A new kid on the gold ETF block is The Royal Mint Physical Gold Securities ETC (RMAU) which has also enjoyed fast growth over the difficult period, reaching USD200 million in assets, revealing a growth of 30.46 per cent since listing on London Stock Exchange in February.

Such was its popularity, RMAU has now been passported to the Netherlands, Luxembourg and Finland.

The firm writes that coronavirus and falling oil and equity prices have spurred investor interest in gold as a safe haven asset. RMAU is the first physically gold backed ETC launched by a European Sovereign Mint, with the custody of gold held at The Royal Mint’s highly-secure, purpose-built vault in Wales.

Jatin Patel, Head of Wealth Management at The Royal Mint, says: “Gold has always been a core portfolio holding, and recent events have spurred investors' interest in this ‘safe haven’ asset. With the addition of the Netherlands, Luxembourg and Finland as markets for distribution for RMAU, more investors will be able to buy and own physical gold securely and responsibly in an ETC backed by a sovereign mint. The passporting is in response to significant demand from investors from these key European countries.” 

In an effort to put some science behind the growing strength of gold, Mobeen Tahir, Associate Director, Research, WisdomTree has published a note which claims that now may be the time for gold to shine.    

Tahir writes: “During times of heightened economic uncertainty or market volatility, investors typically turn to gold to preserve the real value of their portfolios. Such events serve as reminders of the value of the precious metal in a strategic asset allocation, ie nobody knows when a black swan will land. 

“They can also provide attractive entry points for tactical and strategic investors alike. While there are no certainties as to how the price of an asset will move in the future, history can be our guide in identifying helpful leading indicators. If gold behaves as it has in the recent past in response to financial market volatility and economic uncertainty, it may be in for a strong bull run.”

Tahir’s research shows that financial market volatility has often retreated quickly following sharp surges historically creating spikes as evident in the VIX Index (CBOE Volatility Index). Some spikes are relatively contained, he says, like the one in February 2018 which resulted from trading activity in the VIX derivatives market. 

“A broad market meltdown did not manifest thereafter, and volatility levels dropped back quickly. There are, however, only two instances when the VIX spiked to more than 4x its historic average of 18 since the index started in 1994. The first was in October 2008 and the second, in March 2020.

“A shock of this nature is symptomatic of something fundamentally shaking market confidence. In 2008, it was the banking crisis and now, it is the coronavirus pandemic. In 2008, VIX peaked above 80 and retreated very gradually and now, it surpassed 80 in March and is descending leisurely. In 2008, markets endured losses as the global economy fell into recession and now, markets have fallen as the global economy has come to a standstill. In 2008, we saw gold embark on a strong bull run that lasted nearly three years and now, we may see something similar.”

Tahir writes that the coronavirus pandemic is creating unprecedented global economic uncertainty. “Yes, the world has seen pandemics and recessions before but lockdowns at such vast scales, in a world more interconnected than ever, are novel like the virus itself. Economic uncertainty challenges policymakers who are now scrambling to introduce emergency monetary and fiscal measures to prevent the global economy from crippling. 

“In the past, rising economic uncertainty has helped lift gold prices, ie gold’s lure as a safe-haven is augmented when economic risks are profound. The scale and duration of the current shock, its impact on the global economy and the potency of policy measures are all unknown variables. The uncertainty shock may be larger than the one associated with the 2008-2009 financial crisis (Baker, Bloom, Davis and Terry 2020). This may manifest in significantly higher readings in the Global Economic Policy Uncertainty Index when the index is computed for March and subsequent months. It may even accelerate the paradigm shift, Ray Dalio proposed in 2019 towards gold in the face of depreciating value of money as central banks endeavour to deepen the liquidity injection.”

In conclusion, Tahir writes: “Gold has historically come into favour when there is financial market volatility or economic uncertainty. Today, we have both. We believe this provides strong reasons for investors to seek the precious metal. Now may be the time for gold to shine.”

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Beverly Chandler
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