Negative yields for European sovereign debt, continued global political and economic uncertainty and financial market volatility all contributed to assets placed in European gold-backed ETPs reaching a record high in the first quarter.
The figures from the World Cold Council (WGC) suggest there has a been a doubling of AUM in this category over the past three years, and with the European economy likely to slow in 2019, the trend towards further demand in this area seems set to continue.
In terms of weight, inflows into European gold-backed ETPs have surged since 2016 to 2,440.9 tonnes. Globally, European gold-backed ETPs now account for 45% of total AUM.
The biggest drivers of this growth come from the UK and Germany. The UK, in particular, likely due to prolonged uncertainty over Brexit, accounts for 50% of all European inflows into this area or 250.9 tonnes. Germany, meanwhile, saw AUM grow by 218.3 tonnes, representing a 41% share, helped by beneficial changes in the tax treatment of Xetra-Gold. Swiss gold-backed ETP funds under management saw inflows of 50.2 tonnes over the period.
Behind the numbers
There would appear to be clear factors behind the inflows. The WGC analysis points out that uncertainty over the global economy is preeminent.
“Although more than a decade has passed since the global financial crisis, the global economy remains in a precarious state, and this is most stark in Europe.”
Indeed, the WGC suggests that Europe remains “stuck in an economic and political quagmire”. Germany is the main worry, with manufacturing order in February showing an 8% year-on-year decline. Add in ongoing trade tensions and the already evident recession in Italy, and the headwinds are, as the analysis points out, “extremely challenging.”
“While the ECB ended its €2.6trn quantitative easing programme in 2018, it is clear that monetary policy will remain accommodative for as long as necessary,” the analysis says. “Significant rate hikes are unlikely any time soon – a similar situation to the US – as European inflation remains below target, having drifted downwards in recent months.”
If that wasn't enough, European investors also have negative interested rates to content with. “Maturities at the front end of the yield curve for many European sovereign bonds are below zero, with only longer-dated bonds in positive territory.”
The next big driver playing on the minds of investors is the political uncertainty across the globe. The populist wave is causing instability, not least to the whole concept of the EU and anti-EU parties are in the ascendency in many countries, including of course Italy but also in Germany, Poland, Hungary and Austria.
Of course, the UK’s continuing Brexit mess is also dominating the headlines. “Political infighting and tense negotiations are being played out in full view, much to the astonishment of investors.”
Safe havens come to mind for many in such scenarios, hence in the six months leading up to the (now passed) 29 March exit date, UK-listed gold-backed ETPs accounted for 81% of all inflows.
And there’s more
Finally, the last issue playing on the minds of investors in the general market performance and volatility in Europe which has significantly lagged behind the revival in US equity markets.
In the fourth quarter a sharp correction in global equity markets saw a jump in volatility, reflecting fears of frothy valuations and an uncertain growth trajectory.
“While some volatility is generally necessary for markets to function, too much can be crippling. At a time when investors are having to contend with a multitude of issues, managing poor performance combined with heightened volatility has become a major challenge.”
Curiously, perhaps, as the WGC analysis points out while the European gold-backed ETP market is in rude health, the same can’t be said for demand in the bar and coin market where demand remains relatively soft.
The analysis states that bullion dealers have suggested the worries driving the ETP growth have simply not been as front and centre for retail investors, where the bulk of the physical gold buying emanates from.
The “tame” Euro-denominated gold price, meanwhile, might also be acting as a deterrent for retail investors who generally get involved either when the price of gold falls sharply or when it is more clearly on the rise.
The analysis points out that while hard data on the make-up of ETP investors is hard to pin down, the industry word is that it is mostly institutional money that buys into ETPs.