Gold-backed exchange traded funds (ETFs) witnessed a net inflow of $23 billion, or 298 tonnes (t), in the January – March 2020 quarter across all regions, suggests the latest data from World Gold Council (WGC). This is the highest quarterly amount ever in absolute US dollar terms and the largest tonnage additions since 2016.
“During the past year, gold ETFs added 659 tonnes, the highest on a rolling annual basis since the financial crisis, with assets under management (AUM) growing 57 per cent over the same period,” WGC said.
The sharp rise, according to the WGC, was triggered by a flight to safety amid the coronavirus (Covid-19) pandemic that hit world economy hard, plunged most global equity markets into a bear phase and increased the hunt for safe-haven assets, such as Treasuries and gold.
Marching ahead
Globally, gold ETFs recorded a net inflows of $8.1 billion in March 2020 and added 151 tonnes, taking the total holding to new all-time high of 3,185 tonnes.
“Trading volumes and assets under management (AUM) reached record high 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. Despite finishing the month almost unchanged at $1,609/oz, gold was incredibly volatile during March. This realised volatility of gold across tenors rivalled levels last seen during the European credit crisis in 2011,” WGC said.
European funds led regional inflows in March 2020, surging 84 tonnes ($4.4 billion, 5.8 per cent AUM), while North American funds added 57 tonnes ($3.2 billion). Asian funds – primarily in China – also finished the month with strong inflows, adding 4.9 tonnes ($309 million). India, however, witnessed a negative flow of $16.4 million during this period.
Outlook
WGC expects this trend to continue going ahead as well, given the uncertainty surrounding Covid-19 and the hunt for safe-haven assets. “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,” WGC said.
When stocks sold off sharply in 2008, gold experienced a few pullbacks, falling more than 30 per cent from peak to trough but rallied back to close 4 per cent higher in the year. What followed was the initial Quantitative Easing (QE) program in the US, along with similar monetary policy interventions worldwide. This propelled gold over 600 per cent higher at its peak in September 2011.
Mirroring the economic rescue efforts, the US Federal Reserve (US Fed) has already slashed rates and announced a QE program to bring the Covid-19 hit economy back on track. Likewise, most other central banks, too, have not yet placed a limit on the amount they are willing spend to help prop-up sentiment. In this backdrop it expects investment demand to more than offset a reduction in consumer demand.
"With the Fed taking interest rates to zero for the foreseeable future, gold could do well as it tends to outperform during easing cycles. Additionally, multi-trillion dollar fiscal stimulus policies to combat the economic impact of Covid-19 could prove inflationary – a development that could support gold prices in the long run," WGC said.
