Changing landscape for gold ETFs

15 March 2017   Category: News, Asia, China, USA   By Natalie Leung

Investment in gold in recent years has in general been mainly driven by exchange-traded funds (ETFs), with about US$25 billion flowing into gold ETFs globally in 2016. While this trend is expected to continue, demand is anticipated to shift from the US market to Europe, given the precious metal’s reputation as a safe haven, according to State Street Global Advisors (SSGA).

Gold prices rose by 25% between January and June 2016, the best performance in 36 years. But there was a huge correction after US President Donald Trump’s election victory, with gold prices ending the year with an average increase of 8%, the first annual gain registered since 2012.

SSGA’s SPDR GOLD Shares (GLD), the world’s largest physically-backed gold ETF, recorded net outflows of $4.8 billion following President Trump’s victory for the period between November 9 and December 31, 2016.

“Last year, the US was the top consuming country before Trump’s victory, but after that there were lots of outflows from GLDs and iShares,” Robin Tsui, ETF gold specialist at SSGA, told Asia Asset Management in an exclusive interview. “Meanwhile, Europeans keep buying as they think Trump will be negative against other countries.”

Amidst fears about President Trump’s potential policies on Europe and the upcoming elections in several European countries, Mr. Tsui sees many European investors flocking to buy gold to hedge their currencies as gold is priced in US dollars.

Interest rates are another issue haunting investors. US interest rates are expected to rise, which would result in higher opportunity cost in gold investment because it does not pay any yield.

“However, only the real interest rate would affect the gold price,” said Mr. Tsui. “Even though the nominal interest rate will go up, we have to see how fast the inflation rate goes up as well.”

Mr. Tsui believes that if inflation rises faster than interest rates, real rates will go down and may even turn negative, which could potentially be the case if Mr. Trump decides to push all his infrastructure policies.

Still, the more pressing concern is the current low-interest-rate environment, which means investors are chasing for yield in investments such as gold, which is among those gaining a small but increasing traction.

There are two types of gold investors. The strategic ones will have about 1% - 10% of their portfolios invested in gold given its low correlation with other asset classes. “They do not really care about appreciation,” said Mr. Tsui. “Overall they will look at the whole portfolio as, over (the) long term, adding gold does improve Sharpe Ratio, increase returns and reduce risk.”

The second type of gold investors take a tactical approach, buying purely for price appreciation. Mr. Tsui pointed out that many GLD investors are tactical traders, given its low fee and efficiency to trade in and out the market.

He said SSGA attracted very strong institutional demand last year, with about 60% of its funds traded by institutions.

According to Mr. Tsui, many asset managers now have portfolios with multi-asset classes, with gold making up about 20%-30% of the portfolio, compared with portfolios composed of only equities and bonds in the past.

While gold price is driven by the US dollar, demand for gold is global. Investors have to take a global perspective, pricing gold into different currencies. “If you look at gold in pound, yen or yuan, it actually goes up a lot,” said Mr. Tsui. “For example, gold in sterling was up by 30% last year due to depreciation of the pound, so in that sense gold outperformed other indices.”

The depreciation of the RMB and China’s stock market turbulence last year also helped draw $1.2 billion worth of inflows into the four Chinese gold ETFs, according to Mr. Tsui.

China’s gold market is relatively new. It opened in 2004 and gold ETFs only launched in 2013. But the country has become the largest gold ETF market in Asia Pacific with a market capitalisation of $1.5 billion.

Institutional investment in gold in China are mainly made by asset management firms, as pension funds and insurance companies are not yet allowed to invest in the precious metal. Although China is considering opening up the market to pension funds, insurance companies may still have to wait, as they need yield from investments to meet their liabilities, remarked Mr. Tsui.