An analysis of the flow of investment into exchange-traded funds (ETFs) and similar investment products that offer exposure to physical gold show that investors loaded up on gold during a year in which the world lurched from one crisis to the next.
Globally, gold-backed ETFs recorded the highest inflow of new investments during 2020, leading to ETFs worldwide buying an additional 877 tons of gold.
The increase in investment in physical gold via ETFs in 2020 dwarfs the previous annual record of 2009 when funds reported net purchases representing 646 tons of gold.
This increase in gold purchases is the largest ever in a single year, increasing the total amount of gold owned by investors in ETFs and similar investment vehicles to 3 752 tons at the end of 2020.
A report by the World Gold Council states that total gold holdings was even higher at the beginning of November at 3 915 tons before net outflows in the last few weeks of the year.
The report notes that the 3 752 tons of gold locked away on behalf of investors at the end of the year also represents a new record.
We all remember 2009, the year when huge banks and other financial institutions failed around the world, financial assets nearly halved in value and predictions about the fall of capitalism peaked. Gold was the go-to then, and seems to have become even more popular when the coronavirus pandemic hit the world last year.
Interest rate impact
“While the ultra-low interest rate environment drove inflows in January and February, the global spread and severity of the Covid-19 pandemic from March onwards boosted interest in gold,” says the report. “The heightened risk environment, fiscal and monetary responses to the economic impact of the pandemic and gold price momentum continued to drive inflows in the second half of 2020.”
Detailed figures show that the pace of inflows into gold-backed ETFs slowed after the gold price hit a new record of above $2 000 per ounce in early August and investors seemed to have started taking profit after that, with net outflows recorded during the last weeks of November and in December.
The World Gold Council says the strength in demand for gold ETFs – an easy way for investors to buy and own physical gold without taking delivery of the gold itself – can be seen when comparing it to other ways of buying physical gold.
During 2020, demand for gold bars and coins was mixed.
Demand was strong in western markets, but mostly weak in the east. “As a result, over the first three quarters of 2020, gold ETFs accounted for almost two-thirds of total investment demand,” says the report.
Investors reduced their hedges and increased their risk-asset exposure amid positive sentiment following the US election and the announcement of successful Covid-19 vaccines towards the end of 2020, leading to sizeable outflows of 109 tons in November. While outflows continued into December, they slowed considerably and were modest by comparison at 40 tons.
It’s interesting that the gold funds on the JSE did not experience the same growth as seen in the rest of the world last year.
1nvest executive Johann Erasmus says the 1nvest Gold ETF also experience record inflows in 2020, but quoted figures that show the fund actually ended the year with less gold in the vaults than at the start of the year.
“We started on R1.4 billion in assets under management, rising to over R4 billion and then closing the year on R1 billion as our clients took profit on their positions post the rapid rise in the gold price,” explains Erasmus.
Absa’s gold ETF
Absa’s NewGold ETF also saw an outflow of investments and thus lower gold holdings at the end of 2020 than a year earlier.
Michael Mgwaba, head of exchange-traded product business at Absa Corporate and Investment Banking, points out that NewGold has seen a decrease in investment since a record high in 2018, alluding to the steady decrease in the value of the rand which gave local investors huge returns and more reason for profit-taking.
The NewGold ETF fact sheet shows that holdings reached a record high of around 1.7 million ounces in August 2018, declining nearly steadily every year to less than 700 000 ounces at the end of December 2020.
However, there were periods of strong inflows. Mgwaba says inflows into the funds are determined by economic outlook and investors’ need to diversify investment risk in general.
“The behaviour of the gold price largely determines the inflow or outflow. We are living in times where there is high level of uncertainty caused by many factors like slow economic growth, geopolitical risks and now recently Covid-19.
“Therefore, an investment portfolio that is designed to stand the test of times and to weather these types of storms should be a well-balanced portfolio that includes assets that also provide the benefits of long-term sustainable returns, effective diversification and liquidity. These benefits can be realised by the inclusion of gold,” says Mgwaba.
“Yes, gold does not pay interest or dividends, but we are living in world of low interest rates and lower dividends, a world where capital appreciation and liquidity will be key,” he says.
“All these features suggest that gold as an investment class can offer reliable support during uncertain market condition, but also under normal market conditions.”
Gold as an uncertainty indicator
The sharp increase in the gold price to a new record high last year – only beaten in August 2011 if the gold price is adjusted for inflation – and an overall rise in volatility of asset prices during the last 12 months, both give an indication of the level of uncertainty.
The World Gold Council points out that while the gold price increased by 25% to hit a historical high of more than $2 067 per ounce and then fell back some 12%, it “recovered to finish the year among the best-performing assets, despite many stock indices reaching or surpassing all-time highs”.
The NewGold fact sheet shows that investors did much better and that unit prices increased by nearly 30% from beginning January to end December due to the decline in the rand.
The return over three years was just shy of 20% per annum.
The World Gold Council says gold’s volatility during the year was much higher than in the past with annualised volatility at 20%, the highest level since 2013 and significantly above the longer-term average of around 16%. (Volatility is calculated based on the annualised daily standard deviation since 2000.)
“However, the increase in gold’s volatility should be viewed in the context of the increase in volatility of all assets. Most assets saw volatility increasing last year. For example, the volatility of the S&P 500 climbed to a whopping 32%, almost double its long-term average of 18%,” according to the report.
While last year was interesting, investors are probably more interested in what the gold price will do in 2021.
The World Gold Council is preaching further increases (as part of its job). Its Gold Outlook 2021 report states that the global economic recovery and low interest rates will set the tone for gold this year.
In summary, the authors believe that periods of uncertainty will boost the gold price from time to time, that central banks and investors will remain net buyers, and that any recovery in economic growth rates will lead to an increase in consumption. All that will be good for precious metal prices.
It lists three big positives for gold due to potential portfolio risks:
- Ballooning budget deficits,
- Inflationary pressures, and
- Market corrections amid very high equity valuations.
In addition, it says expected stronger growth in China and India will boost consumption demand for gold.
Local investors must also sit back and contemplate the outlook for the rand, which will affect returns significantly.
The Krugerrand serves as a good proxy for anybody who would like to try and make a prediction. The latest JSE price for a one-ounce Krugerrand is R29 500, compared to R22 300 at the beginning of 2020.
The highest price last year was R36 500 when gold hit a high in August and the rand was heading towards R18 per dollar.
Will gold break above $2 000 per ounce again this year, and stay there? What will the rand do?