By the end of June 2020, gold reserves in the reserves of the world’s exchange-traded funds – ETFs and similar products – ETP showed a new record of 3,621 thousand tons (116.4 million ounces), which is 104 tons higher than at the end of May, according to the World Gold Council ( WGC).
The first half of 2020 was a record for the inflow of funds in gold-backed ETFs. The inflow amounted to 734 tons, which is more than at the previous peaks of investment demand in 2009 and 2016. The main volume fell on the USA – 449 tons, and Great Britain – 143 tons. In Asia, ETFs grew at about the same pace, but volumes were more modest – in half a year they grew by 21% or by 22.9 tons – to just 102.2 tons.
ETF inflows were the main driver of gold in the first half of 2020, but the rise in prices at the same time accelerates investment demand.
Which came before – the chicken or the egg? According to WGC Director John Mulligan, the answer is in the reaction of investors and their expectations – not only in how investors perceive the current and future dynamics of gold prices, but also in how they perceive macroeconomic conditions, market and geopolitical risks. ETFs are liquid and transparent. Buying and selling in ETFs reflects the sentiment of professional investors, and this affects retail investors – a natural process, as in other markets.
At the same time, “the demand for ETFs is not only speculative, it is also a strategic insurance against market volatility. And the long-term forecast of gold prices is not only an influx of ETFs, but also the main long-term factor – the growth of wealth and purchasing power of the countries of the East”, – says J. Mulligan,
ETF inflows of 734 tonnes of gold in the first half of 2020 are more than record purchases of gold by central banks in 2018 and 2019, and corresponds to approximately 45% of global gold production in the first half of 2020.
Smaller, but comparable volumes of ETF inflows were noted in 2009 and 2016. In January 2009, the US Federal Reserve announced that it would keep interest rates at low, almost zero, levels and will use all the tools to pull the economy out of the recession. In early 2016, contrary to expectations, she did not continue to raise rates after one increase in December 2015.
The inflow of funds in ETFs now, as in 2009 and 2016, is a consequence of the rate cut. At low interest rates, the opportunity cost of investing in gold that does not generate coupon returns also decreases. In addition, investment demand for gold is fueling fears of a second wave of coronavirus and a slower-than-expected global economic recovery. These factors are in effect now and are likely to continue in the near future.
Along with the inflow of ETFs, jewelry demand dropped significantly – in the first quarter of 2020, the decline was 39% compared to the same quarter last year. There is no data for the second quarter yet, but it is already known that India in June reduced imports by 86% to 11 tons, and in April and May, imports actually stopped. India and China are the largest consumers of gold in the world, while if China is also a major producer, India imports almost the entire volume.
If demand for gold in ETFs persists and jewelers recover, will this be a driver for prices in the second half of the year?
According to J. Mulligan, the quarantines due to the coronavirus epidemic have had a strong negative effect on jewelry demand, especially in India and China, where consumers had very limited access to jewelry amid rising prices. Rising prices often reduce the demand for gold jewelry, even in less challenging times.
According to J. Mulligan’s forecasts, the demand for gold jewelry will remain low, at least until the end of the year, including due to the fact that the pandemic has disrupted the usual turnover of stocks and distribution channels.
“Even seasonal demand will take some time to recover together with a return to normal social interaction. However, jewelry demand rarely causes an immediate reaction in the price of gold, it rather forms long-term trends,” he said in an interview with Vestnik Zolotopromyshlennik Director of the World Gold Council John Mulligan.
Gold Miner Bulletin