Exchange-traded funds dump gold for dollar

The month of September was the fourth month in a row that dimmed the lustre of the yellow metal. Gold prices declined by 3.7% in the month of September as compared to August, states a World Gold Council report. As of September 2023, the year-to-date holdings of Gold ETFs have declined by 5% and the asset under management has reduced by 2%. Year-to-date, global outflows stand at $11 billion and total holdings have fallen by 189 tonnes at the end of September 2023.

The net outflow for the month was $3 billion, corresponding to 59 tonnes of physical gold-backed ETFs. In September, a net outflow of $2 billion corresponding to 35 tonnes, happened from funds listed in North America, while European Funds' outflow amounted to $1 billion, that is, 28 tonnes. At the same time, for the seventh consecutive month, Asian Funds contributed to net inflow, which was $299 million, or 5 tonnes, in this month.

The months of August and September witnessed the heaviest outflow from the North American region, with the most liquid funds losing the most. The region shed $5 billion corresponding to 79 tonnes, for the two months combined.

The fall in Gold ETF prices can be directly correlated to the strengthening of the U.S. dollar and increase in bond yields. The Federal Reserve of the U.S. had been consistently increasing rates from March 2022 till July 2023, which are now in the 5.25% to 5.5% range. While the string of rate hikes took the U.S. interest rates to their highest levels of more than 20 years, the Fed has currently adopted the wait-and-watch policy as it feels that the economic condition of the U.S. is improving. The first half of 2022 witnessed 40-year high inflation in the US, which is now getting tamed due to rate hikes. The aftermath of the rate hike is also that the payments from US Treasury Bonds and the interest rates on U.S. checking accounts are at their strongest in more than two decades. While the U.S. Fed has paused interest rate hikes, it has significantly revised the projections of US economic growth and 2024's median interest rate. The investors read this as a sign that the interest rate in the US will continue to remain high for a longer time, thus diminishing investors' interest in gold.

The second worst outflow was witnessed in the European region, mostly led by funds in Germany and Britain, amounting to the year-to-date outflow of $7 billion which is equal to 124 tonnes, by the end of September. In September, the European Central Bank delivered its tenth consecutive rate hike and reiterated that the rates will stay 'at sufficiently restrictive levels for as long as necessary'.

Another factor contributing to the decline of Gold ETF rates was fall in Chinese local premium, as per the report. China had reduced the Gold import quota of many of its commercial banks since July, which had resulted in a huge gap in Gold demand and supply. This led to a surge in Gold price premium in China till around the third week of September 2023 when the import curb was lifted. Coincidentally, the bulk of the downfall in Gold rates happened in the fourth week of September; in the last three days of the month, to be precise.

While the Asian Funds, primarily led by Japan and China, have continued to deliver net inflow for seven consecutive months in September, the inflow for this month was lower compared to that in August. While the year-to-date inflow in the Asian region stood at $904 million corresponding to 14 tonnes, in September, bulk of the inflow, $860 million corresponding to 13 tonnes, happened during Q3, possibly due to import curbs in China.

The World Gold Council report concludes that gold is likely to face continued turbulence over the next few weeks due to buoyancy in the U.S. economy. However, this may not be a long term trend as this phenomenon is supported by fragile equities, rising recession risk, inflation volatility and continued central bank interest in gold. The report also tips off that, in case the market becomes excessively short, there could be a buying opportunity for some investors.