Interest rate upswing cause gold ETFs downslide

Since raising interest rate is the textbook liniment for soothing down inflation, the allure of gold has decreased globally as several central banks hiked interest rates. The yellow metal has always been considered to be the classical hedging asset against inflation that has been on a rampage of late.

Money worth 53 tonnes ($3.1 billion) flew out of global gold ETFs in the month of May, ending the four-month run of positive inflows. As per gold ETF commentary by World Gold Council dated June 02, outflow from global gold ETFs in May was the largest monthly outflow since March 2021. The total holding of global gold ETFs stands at 3,823 tonnes ($226 billion) at the end of May 2022.

Interestingly, the average daily trading volumes of gold in May, at $137 billion, was higher than previous year’s daily average of $130 billion. At the end of May 2022, global holdings of gold ETFs were up 8% year-to-date and around 3% (99 tonnes) below the November 2020 peak of 3,922 tonnes.

North American Gold Un-rush

As many nations around the globe reversed their easy money policies and started hiking rates, all regions saw net outflows. North American investors shunned gold ETF in the first half of May as the U.S. Federal Reserve hiked rates by 50 basis points on May 04. It is noteworthy that the North America-listed gold ETFs accounted for almost two-thirds of the total outflows with 34 tonnes ($2 billion) of selling, the report says.

Since the U.S. is witnessing a multi-decade high inflation, the U.S. central bank has taken a slightly aggressive stance. Experts believe that the Fed is behind the curve when it comes to raising rates to tame the inflationary beast. For sure, the Fed has not increased interest rates in increments larger than 0.25% since May 2000.

The rising U.S. dollar, coinciding with rate hikes, weighed on gold in the early part of May. Momentum from ETF outflows fuelled the gold price slide to $1,800 per ounce by mid-may. The prospect of potential recession and a respite in dollar strength may have encouraged the flurry of inflows late in the month. Although gold swiftly recovered from a low level of $1,800 per ounce but the rebound ran out of steam and hovered around $1,850 per ounce by the month end, the report states.

European gold outflow predominantly British in nature

Similarly in Europe, rate hikes had adverse impact on flows. Total holdings of Europe-listed gold funds fell by 17 tonnes ($1 billion) where the majority of fall came from the U.K. based funds. As Bank of England hiked rate to a 13-year high, investors shunned gold ETFs with an outflow of 14 tonnes or $856 million. Bank of England delivered a fourth consecutive rate hike that put a dampener on gold investment.

John Rubino, an author and editor of dollarcollapse.com, says that gold is a "safe haven" asset that people buy when the world becomes unpredictable. So it generally does well when war or political unrest complicate things.

In resonance with Rubino, outflows elsewhere in the European region were trivial as interest rates remained firmly negative, and geopolitical uncertainty remained heightened due to the prolonged war in Ukraine. The ECB is expected to announce a hike in its July meeting, which may cast a cloud over ETF investment in the region in the meantime, as per the report.

Mixed responses on gold from other parts of the world

Outflows from ETFs listed in 'Other' regions were barely changed, as marginal inflows into Australia-listed funds partly offset fractional outflows in South Africa.

Total North American gold ETF holding stands at $115.6 billion while Europe and Asia gold ETFs holding are at $99.5 billion and $7.5 billion, respectively.

Minor outflows in Asia were again largely reflective of China, which lost two tonnes ($116 million). The modest recovery in the CSI300 stock index in May — halting the almost consistent year-to-date slide — may have contributed to outflows from ETFs by whetting investors’ risk appetite, the report states.

India’s love for yellow metal continues

Indian gold ETFs witnessed small net inflows of 0.4 tonnes ($23.2 million) in May. The demand for gold ETFs may primarily be due to the macro backdrop of higher inflation and a depreciating rupee, despite interest rate hikes by RBI.

As per Association of Mutual Funds in India (AMFI) website, at the end of March 2022, gold ETF AUM was ₹19,281 crore while at the end of March 2021 it stood at ₹14,123 crore.

Total gold ETF folios have recorded 10 times growth within 27 months in India. While at the end of December 2019, India had just 4.23 lakh gold ETF folios, at the end of March 2022 there were 42.41 lakh folios. However, these numbers are miniscule as compared to 8.59 crore folios of equity-oriented mutual funds, indicating the immense scope of growth for Gold ETFs.

Currently, there are eleven active Gold ETF schemes by various mutual fund houses. As per RBI norms, all ETF schemes are backed by physical gold, so ETF positions are generally expressed in quantum (metric tonnes). One metric tonne is equal to 1,000 kilograms.

Also, in India, gold is an asset, ceremonial gift, jewellery, ornament and status symbol, all rolled into one. The demand for physical gold is humungous as compared to its digital counterpart.