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Global gold-backed ETF flows: March 2020

2020 highlights say, global gold-backed ETFs (gold ETFs) and similar products added 298 tonnes(t), or net asset growth of US$23bn, across all regions in the first quarter of 2020 – the highest quarterly amount ever in absolute US dollar terms and the largest tonnage additions since 2016. During the past year, gold ETFs added 659t, the highest on a rolling annual basis since the financial crisis, with assets under management (AUM) growing 57% over the same period.

Focusing on March, its’ highlights says, globally, gold ETFs added 151t – net inflows of US$8.1bn (+5%) – in March, boosting holdings to new all-time highs of 3,185t.1 Trading volumes and AUM reached record highs as gold volatility increased to levels last seen during the financial crisis, yet gold price-performance was mostly flat in US dollars for the month. Gold prices denominated in many other currencies, however, continued to reach all-time highs although the price in US dollars remained 15% below its 2011 high. This highlights a continued trend of growth in gold ETFs outside of the US over the past few years; a trend underscored by European funds seeing the largest absolute inflows and Asia and other regions registering the largest percentage growth during the month.

Through one may learn Regional overview is, uncertainty around the short- and long-term economic impacts of COVID-19 continues to drive sharp volatility across many assets, leaving global equities in the bear market territory while encouraging inflows into safe-havens like Treasuries and gold. Against this backdrop, gold ETFs listed in all regions experienced strong inflows during the month.

European funds led regional inflows, growing by 84t (US$4.4bn, 5.8% AUM), while North American funds added 57t (US$3.2bn, 4%). Asian funds – primarily in China – also finished the month with strong inflows, adding 4.9t (US$309mn, 6.4%), and funds in other regions grew 9.4%, adding 4.7t and US$249mn.

Price-performance: Despite finishing the month almost unchanged at US$1,609/oz, gold was incredibly volatile during March. This realized volatility of gold across tenors rivaled levels last seen during the European credit crisis in 2011 and the implied volatility – or how many investors expected gold would move across tenors – reached levels last seen during the global financial crisis.

There are a number of reasons for this, as highlighted in our recent Investment Update: Gold prices swing as markets sell-off. We noted that when risky assets like stocks sold off sharply, investors needed to meet capital requirements; one way they were able to do this was to sell a liquid and outperforming asset like gold. At its trough, gold sold off 7% during the month, effectively giving up its yearly gains.

US treasuries were also weaker intra-month, indicating that gold was not the only safe-haven asset to show weakness. However, similar to the 2008-2009 financial crises, the major tail risk-hedge that worked well – and worked immediately – was the VIX index, and this could potentially give some foresight into upcoming gold price moves. When stocks sold off sharply in 2008 gold experienced a few pullbacks, falling more than 30% from peak to trough but rallied back to close 4% higher on the year.

What followed was the initial Quantitative Easing (QE) program in the US, along with similar monetary policy interventions worldwide, which propelled gold over 600% higher at its peak in September 2011. Other drivers included: higher risk, particularly in the European region, gold’s store of value quality coming to the fore and an improved opportunity cost in the face of lower rates.

In the three months leading up to the September 2008 Lehman Brothers bankruptcy, gold-backed ETF flows were relatively unchanged. Following the QE announcement, gold ETFs added 146t, or 15% to their holdings over the next two weeks and a total of 235t, or 24% to their holdings through the end of 2008, with an additional 1,296t, or 107% in the following 3 years.

On the heels of the most recent sharp selloff, the US Federal Reserve (Fed), along with other central banks, instituted new QE programs, labeled by many as ‘QE Infinity’ as most countries have not placed a limit on the amount they are willing to purchase to help the markets. This pushed gold off its lows to close the month flat.

Gold ETFs added roughly 109t or 3.7% to assets in 2020 leading up to the 19 February peak in the S&P 500. They have since added 189t or an additional 6.3% to assets in six weeks. If the trend mirrors the financial crisis, we could see significant inflows in gold ETFs over the coming months, which has been the case to begin the month of April.

At the time of publication, gold has outperformed most major asset classes this year, up by more than 7%. Gold’s performance again distinguished itself from broader commodities, as the broader commodity indices fell over 13% on the month and oil (WTI) fell by a further 25%.

Gold global trading volumes averaged US$236bn a day in March, an increase of 61% y-o-y, while futures open interest decreased last month from US$122bn to US$106bn as a major futures expiration occurred in the second half of the month. COMEX net longs4, via the COT report, fell sharply in the early part of the month after hitting all-time highs of 1,209t (US$63bn) during February but moved higher as gold rebounded.

Long-term trends: Over the past 12 months assets in global gold-backed ETFs have grown 56%, Following the March inflows, both holdings and assets of gold-backed ETFs are at all-time highs, UK-based gold funds continue to take regional and global market share, now representing 46% of European assets and 21% of global assets, Low-cost gold-backed ETFs in the US have seen positive flows for 21 of the past 22 months and have increased their collective assets by 263%.

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