Rally in equities, dollar sparks 1% net outflow in global gold ETFs

The decline in gold prices also pushed investors to reduce holdings in ETFs

Gold-backed global exchange trade funds (ETFs) witnessed net outflow of 1 per cent in November, on account of a sharp appreciation in the dollar and increasing investor interest in equity markets.

Data compiled by the World Gold Council (WGC) showed total outflow of 30.1 tonnes (worth $1.3 billion) from global ETFs in November, marking a reversal from five months of continuous inflows that had led to a record holding in October.

A report published by the WGC said: “In November, North American funds led regional outflows, losing 17.3 tonnes ($731 million, 1.1 per cent of assets under management or AUM), as the US dollar strengthened and stock markets reached all-time highs on the strongest monthly performance since June.”

Similarly, European fund outflows ($538 million equivalent to 0.9 per cent of AUM) were driven primarily by UK-based funds, which lost 18.8 tonnes ($871 million or 3.2 per cent) as the Brexit deadline extension prompted a reversal in inflows from October.

Asian funds lost 2.1 tonnes ($119 million or 3.1 per cent), as a result of outflows in China. Funds in other regions grew 7.6 per cent, with a sharp increase in holdings of a South African gold-backed ETF, said the report.

The decline in gold prices also pushed investors to reduce holdings in ETFs.

Although gold prices fell below $1,500 an oz (to $1,460 an oz) — decreasing 3.4 per cent over the month, the total return on gold is still 14 per cent year-to-date, led by central bank demand in leading countries.

“The risk-on environment, coupled with higher rates and easing geopolitical tensions, were headwinds for the price of gold. Yet, gold-backed inflows in 2019 remain a large driver of gold demand this year,” said the report.

Gold prices in India are elevated at around Rs 38,000 per 10 grams, leading to weak consumer demand from seasonal and occasional buyers.

Meanwhile, expectations of further rates cuts by US Federal Reserve continued in November, which also weighed on gold price sentiment. There is some uncertainty surrounding rate cuts by the Fed in 2020, with the probability of only one rate cut next year, which is not expected until at least the second quarter.

Risky assets continued to gain as the perceived market-impacting events like the US-China trade deal and Brexit have been pushed out into 2020. The lack of market risk concerns is highlighted by VIX future positioning, which is at all-time short levels, a sign of extreme bullish sentiment. At times, historically, significant short positioning has preceded sharp stock market sell-offs and subsequent rallies in the price of gold, the report added.