*In India gold ETF net inflows of September too received ₹597.3 crores in September
*Investment demand in gold ETFs suggesting continued long-term strategic positioning
Gold-backed ETFs and similar products recorded their tenth consecutive month of net inflows during September, matching equivalent stretches in 2008 and 2016. Gold ETF holdings increased by 68.1 ton ($4.6bn) or 2.0% of assets under management (AUM) despite gold’s worst monthly price performance since November 2016.
The World Gold Council have just released their latest update for gold inflows to ETF’s for September which are remarkable in the context of the price falls we have seen over that period but also another new record. Global net inflows of 1,003 ton ($55.7bn) in 2020 have led overall gold investment demand and taken the gold ETF holdings universe to a fresh new all-time high of 3,880 ton and $235bn in AUM.
It should be noted that European’s have a much higher propensity to buy physical bullion than Americans and hence ETF’s seen as a secondary option as is also the case for Asian investors. Simplistically, Europeans and Asians have a deeper ‘cultural memory’ of failed governments, failed currencies, and geopolitical turmoil. They see ETF’s yet another derivative or ‘paper promise’ with the counterparty risk that accompanies that. Physical bullion or fully allocated bullion removes that counterparty risk.
North American funds remained the primary recipients of inflows. However, inflows in Asia stand out, as the region grew holdings by 17% and four new funds listed in China. Assets in Europe and other regions grew by 3% and 9% respectively. In India gold ETF net inflows in the month of September too, received around ₹907.9 crores in August and ₹597.3 crores in September. That made it an uninterrupted net inflow for six months in a row.
Gold rallied sharply 22% between April and July, reaching an all-time high at $2089.7 on 7 August. When prices move this quickly there is often a subsequent pause or pullback in the price related to profit-taking or positioning. The recent Commitment of Traders (COT) report for gold COMEX futures of 759 ton ($46bn) confirms reduced net long positioning.
Volumes also fell from $228bn in August to $199bn in September. Notably, global gold ETF volumes fell to $3.2bn from $5.2bn the previous month. Despite the weaker prices, positioning and volumes, investment demand via gold ETFs increased, suggesting continued long-term strategic positioning.
India the world’s second largest gold-consuming nation has seen healthy monsoon rainfall for a second straight year, something that has not happened since the 1950s. This could soften the negative impact of COVID-19 in rural areas which have historically generated around 60% of Indian jewellery demand. Finally, the potential for a COVID-19 vaccine emerging during the quarter has gained momentum.
(Disclaimer: This analysis is only for educational purpose and is not and must not be construed as investment advice. It is analysis based purely on economic theory and empirical evidence. Readers are requested to kindly consider their own view first, before taking any position.) Date: 12-10-2020