Gold ETF Redemptions Slow, Central Bank Buying Strong

Gold made a big splash in the news this week, having broken through the $2,100 (~£1,672.3) per ounce mark, and peaking at an all-time high of $2,152.30.

The surge in price came on expectations of the Fed cutting policy rates amid geopolitical tensions in the Red Sea and the Israel-Palestine conflict.

The yellow metal has since declined and has been trading steadily in the vicinity of $2,050 levels.

Interested readers can check out our coverage on Monday’s price movement here, as well as discussion on a potential break out to $2,300 levels here.

A report from the World Gold Council (WGC) on gold-backed exchange-traded funds (ETFs) found that net outflows had moderated in the month of November 2023 to $920 million in comparison to $2.1 billion in the prior month.

Physical holdings fell 9.4 tonnes to 3,236 tonnes, although the AUM increased to $212 billion, marking a 2% increase over the previous month.

Regional ETF fund flows

The 56.2% MoM decline in net outflows was primarily a result of heavy inflows into North America worth $659.0 million.

This was significant as it snapped a five-month streak of outflows amid an environment of heightened geopolitical risks.

Total North American holdings rose to 1,631.3 tonnes, an improvement of 0.6% MoM.

European net outflows however increased for a sixth consecutive month and totalled $1.6 billion or 20.1 tonnes.

While demand, as a percentage of holdings fell 1.4% over the month in Europe, holdings were measured at 1,411.4 tonnes and an AUM of $92.4 billion.

The report agued,

With the region’s yields remaining at their decade highs, opportunity costs continued to weigh on European investors’ appetite for gold ETFs… (for gold ETFs this month marked) the region’s second worst year-to-date performance in history.

At the time of writing, the German 10-year bunds were trading at 2.20%, Italy at 3.95%, and Spanish government debt at 3.20%.

In Asia, net inflows of 0.6 tonnes in November due to sustained demand from China, Japan, and India, pushed total holdings to around 135 tonnes.

Meanwhile, AUMs in the region increased by $47m to $9.3 billion.

Central bank purchases

In a report from 5th December which analysed gold buying by central banks, the WGC noted that October reserves increased by 42 tonnes.

Although, this was a significant moderation from September’s combined purchase of 72 tonnes, it remained well above the monthly average from January to September of 34 tonnes.

Central bank buying in the month of October was almost completely concentrated in China and Turkey, and accounted for 54.7% and 45.2% of the total, respectively.

China’s total holdings increased by 23 tonnes to 2,215 tonnes while Turkey’s were up by 19 tonnes to 498 tonnes.

Although China’s reserves grew 204 tonnes on a year-to-date basis, Turkey’s total holdings declined by 44 tonnes given the country’s economic policy actions in response to inflation and currency volatility earlier in the year.

Outlook

Year-to-date, global gold holdings of ETFs had fallen 235 tonnes, nearly a fifth lower since the all-time month-high of 3,916 tonnes registered in October 2020.

Positive inflows have been concentrated in Asia with demand up 15.9 tonnes YTD, versus North America and Europe where this has slipped by 93.1 tonnes and 155.4 tonnes, respectively.

Investors will keep a close eye on North America, to see if positive ETF inflows can be sustained in the coming months.

The upcoming jobs report from the Bureau of Labor Statistics which is due this Friday may influence greater physical demand trends.

Consensus forecasts published by TradingEconomics.com place nonfarm payrolls at 180K, above the previous month’s 150K, while the unemployment rate is expected to remain steady at 3.9%, and average hourly earnings are forecast to moderate to 4.0% YoY.

Given expectations of the Fed cutting rates, as well as the potential for geopolitical disruptions, central bank demand is expected to continue its upward trajectory.

While the outlook remains uncertain, physical gold is still very much in favour and continuing its strong show. Gold ETFs on the other hand, have shown weakness during the year, apart from in Asia. Market participants shall be closely tracking these trends with expectations that the metal may reach new highs in a month or two.