What is behind outflows from global Gold ETFs?

Contrary to the prevailing trends in global Central Banks' actions, Gold backed Exchange Traded Funds (ETFs) are currently divesting from the precious metal. Physically backed Gold ETFs saw net outflows of $2.3 billion in July, equivalent to a 34-tonne reduction in holdings.

By the end of July, total holdings of global gold ETFs fell to 3,864 tonne,14% below the previous record low of 3,919 tonne set in October 2020. All regions experienced outflows in July except for Asia.

Total assets under management (AUM) of global Gold ETFs stood at $215 billion at the end of July. The higher gold price helped moderate gold ETF outflows, which were 39% lower in July than in June, as per World Gold Council (WGC).

India Gold ETF AUM currently stands at $2.8 billion which corresponds to 38.6 tonne. Contrary to its global peers, Indian ETF funds saw a net inflow of $43.4 million which corresponds to 0.6 tonne of physical gold in the month of July.

Overall, in the first seven months of the year global gold flows were minus $4.9 billion, a cumulative reduction of 84 tonne in holdings. This stands in stark contrast to Central Banks that bought 387 tonnes of gold, marking the highest H-1 volume since 2000, as per WGC.

Why are Central Banks and ETFs in divergent mode?

Central Banks purchasing patterns are predominantly influenced by their Reserve portfolio composition and mounting geopolitical uncertainties. The rationale underlying this divergence can be attributed to the fundamentally different motivations where Central Banks are primarily motivated by strategic reserve management, while ETFs are profit oriented.

Gold, despite its longstanding reputation as a safe-haven asset, has found itself unable to breach the psychologically significant $2,000 per ounce threshold. This has prompted astute investors, colloquially known as 'Smart Money,' to exit the precious metals market and redirect their investments towards the thriving stock markets. This migration underscores the prevailing sentiment that equities offer more promising returns in the current economic landscape.

Furthermore, the international geopolitical arena has witnessed an uptick in uncertainty, primarily due to the concerted efforts of the BRICS nations in introducing an alternative international trade currency to challenge the dominance of the US dollar. In response to this evolving landscape, Central Banks worldwide have begun divesting from Dollar denominated assets, such as US treasuries, and instead, they are allocating a portion of their reserves to precious metals. This strategic shift can be seen as a hedge against the potential volatility that may arise from the changing global currency dynamics.            

Flow Chart of Gold ETFs in July

All regions experienced outflows in Gold ETFs in the month of July except Asia. 

North American funds saw their second consecutive monthly outflows in July. But the $986 million selling was notably lower than in June that witnessed an outflow of $2 billion. The US Fed increased rates by 25 basis points in July, but with recent inflation data softening, investors expect the Fed’s current tightening cycle to end soon. While such expectations supported the gold price, they also led to investor risk-on sentiment and a rally in equities, which may have diverted investment away from gold, says a July WGC report.

Despite recent outflows, year to date demand in North American funds stayed positive at $567million (4 tonne), dominating global inflows.

European funds shed $1.3billion (minus 18 tonne) in July. To tame the region’s stubborn inflation pressure the European Central Bank and the Bank of England lifted their policy rates to multi-decade highs. Combined with investor expectations of further rate hikes ahead, interest in gold ETFs remained tepid in the region. On a positive note, forex-hedged products in Europe continued to see inflows amid changes in local currencies. So far in 2023, Europe registered a net outflow of $5.5 billion (minus 87 tonne), far outstripping inflows elsewhere. The majority of outflows came from UK funds (minus $2.7billion).

Asia registered an inflow of $132 million (2 tonne) in July. Japan inflows outweighed outflows from Chinese funds during the month. In the first seven months of the year, Asia is the only region with positive gold ETF demand apart from North America, attracting $177 million (3 tonne). The majority of this has come from Japan ($170 million), possibly driven by a 14% rise in the local gold price and persistent inflation.

Others continued to see negative demand of $94 million (minus 2 tonne). South African funds accounted for the bulk of the region’s outflows, potentially impacted by lower safe-haven demand from local investors in the face of a strong local currency and rapidly cooling inflation. During the first seven months the Other Region lost $164 million (minus 3 tonne), mainly from South Africa (minus $131 million) and Australia (minus $76 million).

Also as per WGC, Global gold trading volumes rebounded to $173 billion per day in July, 14% higher on month on month basis. The gold price experienced a stronger month than June and volumes rose accordingly. Trading volumes on Over The Counter (OTC) markets were 5% higher whilst gold trading activity at exchanges jumped by 29%, led by COMEX. In contrast, global gold ETFs trading activities declined, with the average volume falling by 18%.