Uncertainty sparks a rush for gold
London (Feb 1) Syriza's electoral victory in Greece and fears that its anti-austerity stance could spread to other eurozone countries have sent many investors scuttling back to the perceived safety of gold and gold funds.
Commodity funds in general had already begun to enjoy strong inflows spurred by uncertainty over the decision in January by the European Central Bank to begin quantitative easing and the Swiss central bank’s decision to remove its currency ceiling.
Cameron Brandt, director of research for fund data company EPFR Global, says: “Gold funds recorded their biggest weekly inflow [in the week ending January 23] since the fourth quarter 2011. The desire to invest in tangible assets — even those under pressure from supply and demand factors — saw commodities and energy sectors take in more than $3.5bn between them.”
Data from ETF Securities show that its physically backed gold ETPs attracted $120m in net inflows in the first three weeks of January.
The uptick in interest follows massive outflows in the fourth quarter of 2014. ETF Securities’ Gold ETPs saw $3.1bn in net withdrawals globally, predominantly from US investors whose confidence in US markets was strengthening.
But it was not just the yellow metal that proved popular. Despite the precipitous fall in the price of oil, ETF Securities’ Brent Oil ETPs saw $204m in net European inflows from January 1-21 while WTI ETPs garnered $297m worth of investors’ money for the same period.
These inflows could be ascribed in part to the growing popularity of ETFs in general — 2014 saw a total of $2.79tn invested in ETFs globally, according to consultancy ETFGI. However, Rima Haddad, head of institutional sales for ETF Securities, believes investors are now looking for safety and are attracted to commodity-based ETPs because of their attractive discounts.
For example, positive noises coming from the US Federal Reserve in 2013 sparked a mass sell-off in gold. About 29m ounces, which ETFGI priced at over $40bn, were sold by ETF investors, especially in April and June 2013. They continued to shed gold assets and gold ETPs in 2014.
Since the start of January, however, gold prices have been appreciating.
“The unpredictability of what policy makers will do next is a big factor as to why people are positioning themselves in the gold market,” says Ms Haddad. She adds events such as the EUR/CHF peg dropping 30 per cent in one day last month as the Swiss franc rose against the Euro, big QE programmes and elections in the eurozone add to the disquiet.
“It’s no wonder people feel equity exposed. Gold can provide a much-needed protection in this unstable environment and because ETFs offer cheaper, liquid and more price-transparent ways to get this hedge than investing directly in bullion, we have seen higher inflows than usual into commodity ETPs.”
Roland Khounlivong, head of dealing and settlements at GoldMoney, agrees: “Investors do seem to be adding gold into their portfolio as a haven amid further economic uncertainty.”
It certainly seems that commodity ETPs are being used as a means of long-term diversification, rather than by investors hoping for a quick buck.
Philip Milton, an independent investment adviser, says: “Anything can happen in the markets and so I have been increasing exposure to commodity-based assets. I am adding gold in the form of a physically backed ETF, but I am looking for an uncorrelated hedge, not a swift gain.”
Whether retail investors will continue flocking into commodity ETPs remains to be seen. Equity markets are becoming adept at pricing in the effects of QE, and the FTSE Eurofirst 300 rose strongly on the back of the EU’s asset purchasing programme.
Will the hot money flow back into equity ETFs? Investors can be fickle, as the recent outflow and inflow data show. Whatever happens, as Mr Khounlivong says, “It’s going to be an interesting year”.