Investors have spent $49.1bn buying gold ETFs so far this year © David Gray/AFP via Getty Images

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Record inflows into gold exchange traded funds propelled the price of the precious metal to an all-time high last month in a rally fuelled by concerns about the huge cost of emergency responses to the pandemic.

Holdings in gold-backed exchange traded funds and similar products have risen by 899 tonnes, or 31 per cent, in the first seven months of 2020, already exceeding the annual increase of any previous year. Total gold ETF holdings stood at a record 3,785 tonnes at the end of July, according to the World Gold Council, the trade body representing bullion mining companies.

Investors have spent $49.1bn buying gold ETFs so far this year, pushing the value of holdings in these vehicles to $239bn.

Strong investor demand drove the price of gold beyond the $2,000-an-ounce mark for the first time during August. Gold touched $2,075.8 in early Asian trading on August 7 but a correction rapidly followed. Bullion retreated to $1,865.8 by August 12 and ended the month at $1,957.4, a gain of 29.2 per cent on its price of $1,514.8 at the beginning of January.

Established long-term bullion holders drove buying interest in the second quarter by increasing their allocations, US regulatory filings suggest. “This bodes well for the longer-term price uptrend,” said Suki Cooper, precious metals analyst at Standard Chartered in New York.

But she also cautioned that any investors entering the market for the first time were buying at near-record levels and these positions might be less resilient if prices retreated.

“Gold ETFs will be key to track to determine whether strategic allocations are weakening,” said Ms Cooper.

Bank of America is forecasting gold will reach $3,000 an ounce over the next 18 months, driven up by declines in real (inflation-adjusted) interest rates and dollar weakness as a result of the severe disruption to the US economy caused by the pandemic.

BofA estimates investors have allocated just 3 per cent on average of their assets to gold, suggesting the increase in demand so far from institutions remains relatively modest.

“The rally [so far] has mostly been driven by investor buying. And we see that [trend] continuing over the course of the next six to 12 months,” said Francisco Blanch, commodity strategist at BofA.

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Positive sentiment towards gold has been strengthened by the Federal Reserve’s announcement in August that the US central bank was prepared to tolerate higher inflation to boost growth and jobs. This has raised expectations that other central banks will follow the Fed’s lead in placing less emphasis on controlling inflation in favour of other measures to stimulate a recovery.  

Eric Wiegand, head of ETF strategy at DWS, the asset management arm of Deutsche Bank, said a growing number of institutional clients were adopting gold as a strategic asset that could provide protection against inflation and deflation risks.

“Real interest rates are deeply negative. This makes it easier to choose gold as a cheap hedge for a portfolio because the opportunity costs [income forgone from investing in bonds] of holding gold are so low,” he said.

The strength and consistency of gold ETF inflows since the middle of 2019 point to a structural shift, according to Mr Wiegand.  

“Sentiment among all types of investors, both institutional and retail clients, will remain favourable towards gold as long as government deficits continue to rise,” he said.

Governments globally have announced $20tn worth of stimulus to counter the impact of the pandemic, driving up the price of gold in sterling, euro, yen and Swiss franc terms this year.

James Steel, chief precious metals analyst at HSBC, said the economic and financial uncertainties would support gold well into 2021. But he also warned current high levels of ETF demand were unlikely to be sustained as the worldwide recovery was expected to gather pace next year.

HSBC expects ETF demand to drop to 200 tonnes in 2021.

“ETF demand can be fickle,” warned Mr Steel. The gold price could be more vulnerable to any downturn in investment inflows because other key demand drivers have been hit hard by the pandemic. Gold jewellery demand dropped almost half in the first six months of 2020 due to rising unemployment, shop closures and travel restrictions.

Declines in crude oil prices have curtailed or even eliminated gold purchases by central banks in oil-exporting countries. As a result, overall buying interest from central banks could shrink by as much as half this year, according to HSBC. It is forecasting that gold prices will end 2020 at around $1,845 and retreat to $1,705 by the end of next year.

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