Gold vs digital gold: The great dichotomy

Globally, there's a dichotomy emerging between global gold prices and the performance of its digital avatar: gold ETFs. On one hand, Gold prices hit a record high in the first week of March at $2,142.85 per ounce, on the other, outflow continued in physical gold-backed Gold ETFs for the ninth consecutive month, shedding $2.9 billion in February alone. In the first two months of 2024, outflow from global gold ETFs has piled up to a massive $5.7 billion.

In February, collective holdings of global Gold ETFs lost 49 tonne to 3,126 tonne, 20% lower than their month-end record of 3,915 tonne in October 2020. Combined with a 0.3% gold price fall, total Assets Under Management (AUM) fell to $206 billion or minus 1.8% on a month-on-month (MoM) basis.

Gold neither pays interest nor pays dividends whereas, stocks and bonds pay dividends and interest. Thus, when there is buoyancy in the stock market and the possibility of rate cuts, smart money (institutional players) moves out of gold into stock and bonds. Therefore, money flow into gold ETFs is always relative to how other asset classes are behaving. Market experts believe this explains the outflow of money from Gold ETFs.

As per a World Gold Council report, the last time global gold ETFs experienced a similar decline was between May 2022 and February 2023 when outflows lasted for ten months. Nonetheless, the two recent rounds of sustained outflows had little negative impact on the gold price performance, which was supported by resilient consumer demand and massive central bank purchases, the report says.

Outlook By Region

North American funds lost the most while outflows from Europe narrowed. In contrast, Asia has now seen net inflows for 12 consecutive months and other regions have seen only limited loss.

So far in 2024, outflows from global gold ETFs have piled up to $5.7 billion. Outflow from North American and European ETFs reached $4.7billion and $1.4billion respectively.

North American funds have experienced outflows for two consecutive months, shedding $2.4 billion in February. For North American funds the first two months in 2024 were the second worst start to a year ever, ranking only after 2013 that saw an outflow of $5 billion. Following February's decline, their collective holdings fell to $103.3 billion (1,569.5 tonne), the lowest in four years.

The still-strong labour market, hotter-than-expected inflation prints, the Fed's meeting minutes as well as recent speeches by Fed officials continued to push forward investor expectations of a rate cut. Consequently, a sharp rebound in the 10-year Treasury yield reduced gold ETF holdings in the region, states the World Gold Council report. Sustained strength in US equities kept diverting investor attention, further denting demand for gold, the report adds.

Asia recorded its twelfth consecutive monthly inflow in February, attracting $200 million. China accounted for the bulk of Asian inflows as investor interest in gold persisted amid the weakening local currency and a stable RMB gold price. Over the past 12 months, inflows into Asian funds add up to $2 billion, a stunning 41% rise in total AUM. Fund flows in the other region were limited, losing $24 million during the month, mainly from Turkey.

Gold ETF Outlook By Country

The highest outflow for February was from the US which saw a massive outflow of $2.34 billion in Gold ETF, equivalent to minus 36 tonne. The second biggest outflow was from Germany that shed Gold ETFs worth $292 million, or minus 4.8 tonne.

The United Kingdom and France saw an outflow of $274 million (minus 4.7 tonne) and $109 million (minus 1.7 tonne) respectively.

In contrast, February saw inflows into Indian ETFs worth $90.3 million, or 1.2 tonne. The Gold ETF holding in India is 44.6 tonne, equivalent to an AUM of $3.3 billion.

China, on the other hand, saw the highest inflow of Gold ETFs worth $109 million, or 1.6 tonne, in February, bringing its total holding to 64.8 tonne and an AUM of $4.3 billion.

Gold Trading

Trading activities across global gold markets contracted, averaging $148 billion per day in February, a 16% MoM fall. Trading volumes at the over-the-counter (OTC) market declined to $96 billion per day, 7% lower than January, possibly driven by weaker wholesale demand in China amid seasonality and fewer working days.

The average trading volume of exchange-traded derivatives decreased by 30% MoM, to $49 billion per day, mainly due to a 31% MoM plunge at the COMEX. Global gold ETF market liquidity remained stable at $1.8billion per day, unchanged from January. Total net longs at the COMEX fell further to 448 tonne by the end of February, 23 tonne lower on MoM basis.