Gold-backed exchange-traded funds (ETFs) are becoming popular again amid signs that Western investors are finally regaining interest in precious metals as global monetary policy shifts toward easing.
Data compiled by Bloomberg show that inflows into gold ETFs in July were the highest since March 2022. That’s a dramatic turnaround from the first half of the year, when outflows from gold ETFs were the largest since 2013, according to the World Gold Council.
Gold prices have hit record highs this year, supported by central bank buying and surging demand from China and other emerging markets. In contrast, many U.S. and European investors have sat on the sidelines or booked profits as gold hits record highs.
Now, the gold ETFs that drove gold to record highs in 2020 may be in the spotlight again. With central bank buying slowing in recent weeks, bulls are hoping these funds can provide fresh support for gold prices.
Gold ETFs have been seeing outflows as prices have risen in the first half of the year, further evidence that the rally is being driven by demand in Asia, both from central banks and from private investors who are long-term buyers of physical gold in the form of jewelry and bars.
Gold ETFs, once favored by many Western investors, have lost their appeal compared with the high returns of government bonds. But now, gold prices are approaching the record set last month as the Federal Reserve signals that it will cut interest rates in September, while rising geopolitical risks, including tensions in the Middle East after Israel assassinated Hamas political leaders in Tehran, may also stimulate Western investors' interest.
Ewa Manthey, commodity strategist at ING Bank NV, said demand for gold ETFs in Europe has rebounded after the European Central Bank cut interest rates in June. The failure of a turbulent French election to produce a clear winner and speculation about a rate cut by the Bank of England also helped reverse outflows from the region.
"These are enough to turn the gold ETF market in Europe around," Joseph Cavatoni, chief market strategist for the Americas at the World Gold Council, said in an interview. Mantesy said further clarity from the Federal Reserve on the outlook for rate cuts could provide a similar catalyst for U.S. investors.
ETFs are one of the simplest ways to invest in gold, and holdings in them have surged along with prices during previous periods of turmoil, including the subprime mortgage crisis, the eurozone debt crisis and the early stages of the coronavirus pandemic.
Total known gold ETF holdings have fallen about 26% from their 2020 peak to $200 billion, but inflows could accelerate dramatically if sentiment among Western investors changes.
Bond traders fully expect the Fed to cut rates three times this year
On Thursday, the 10-year Treasury yield fell below 4% for the first time since February after a manufacturing index and jobless claims data added to evidence that the U.S. labor market is cooling. The two-year Treasury yield fell as much as 11.5 basis points to 4.14%.
Swap dealers are pricing in 85 basis points of easing from the Fed this year — with expectations for 25 basis point rate cuts at each of the three remaining policy meetings. Fed Chairman Jerome Powell discussed the decision to hold rates steady as expected at a news conference early Thursday and said a rate cut “may be on the table” at the next meeting on Sept. 18 unless economic performance in the interim favors waiting.
Gregory Faranello, head of U.S. interest rate trading and strategy at AmeriVet Securities, said three rate cuts do feel a bit over the top, but any weak data from now on will exacerbate the current price action. Powell has set the stage for a big gap between now and September 18, and bets on a 50 basis point rate cut in September may increase, even though Powell said he had not considered that scenario.
“The U.S. unemployment rate exceeded 4% in May for the first time since 2021 and is expected to remain around that level, but this rise in unemployment is going to set off a lot of alarm bells,” Subadra Rajappa, head of U.S. rates strategy at Societe Generale, said on Bloomberg TV.
However, there are signs of crowded positions in the U.S. Treasury market ahead of Friday's July non-farm payrolls report as the market anticipates a massive easing cycle. Therefore, if the non-farm payrolls are strong, it could spur higher interest rates and lead to a reduction in bullish bets.
The article is forwarded from: Jinshi Data