Demand for Gold Surges: Record ETF Inflows

The gold price shines bright again as passive investors seek gold as a safe haven asset, moving away from uncertain equity markets amid global economic weakness 

Karen Kwok 17 May, 2016 | 10:52AM
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Inflows of gold exchange-traded fund in Europe have reached €4.9 billion year to date, making it the most popular sector among passive investors, according to data from Morningstar Direct. 

In February 2016, the precious metals ETFs sector in Europe recorded the largest inflows of €2.6 billion in five years – thanks to the tailwinds of uncertainty around China’s economy and negative bond yields in Europe and Japan. A weak US currency also further bolster the gold as an attractive investment, especially to non-US investors as gold is priced in dollars, Michelle McGrade, chief investment officer at TD Direct Investing says.

“Gold is an important hedge during uncertain conditions, since it tends to have a low correlation to the broader economic environment,” she said.

Holding a view that investors should expect “lower global economic growth for longer”, David Jane, manager of Miton’s multi-asset fund said they have been adding their gold exposure and keeping their net currency exposures “relatively muted”.

Jane thinks the central bankers risk losing credibility if they continue plugging markets but says we are not a risk of another global recession if China unravels or commodities weaken further.

Why Do Investors Like the Yellow Metal?

An upsurge in precious metal ETFs inflows was the “dominant” driver of investments in gold, helping to push price of the yellow metal up 17% over the course of the first three months of 2016, said Alistair Hewitt, head of market intelligence at the World Gold Council. The increase was fuelled by investor concerns regarding economic fragility and negative interest rates.

Hewitt anticipated that ongoing market uncertainty and monetary policies will continue to boost investment demands in gold as a “risk diversifier”.

McGrade agrees, saying it’s “no surprise” that investors are returning to gold as a diversifier and safe haven investment with concerns around market volatility, European bank liquidity, the risk of Brexit and uncertainty regarding US presidency candidates.

Actively Managed Funds Also Rise

While gold price continues to rise, some of the open-ended and closed-end funds that are highly exposed to the sector have benefited.

BlackRock Gold and General has generated return of 64.9% year to date, a boon to long term investors who have suffered annualised losses of 18% over the past five years.

Morningstar analysts Fatima Khizou believes that this Gold Rated fund remains a strong offering for investors seeking mainstream gold and precious-metals equity exposure in a risk-controlled manner.

The fund’s performance has been strong, with returns substantially ahead of the sector equity precious metals Morningstar Category average through fund manager Evy Hambro’s tenure to the end of February 2016. In addition, the fund is not overly expensive with an ongoing charge of 1.9%, which is in line with the category median. Khizou continues to believe this is one of the best offerings available for those seeking exposure to gold-related equities.

McGrade also recommended this active fund as it invests in companies involved in gold mining and aims to deliver a return in excess of the FTSE Gold Mines Index, saying she believes that investing in active funds is an appealing option compared to passive funds.

“The fact it is an active fund means the manager has the flexibility to pick and choose the most attractive gold mining companies rather than tracking the entire index.”

BlackRock World Mining Trust (BRWM), a closed-end fund also run by Hambro that is highly exposed to movements in base metal and gold prices has gained 47.4% year to date, investors in this trust have suffered 22% annualised losses over the past five years.

The management team at this Silver Rated trust is highly experienced and has been successful in applying the outcome of its bottom-up and top-down analysis. Investors in this trust have been well compensated over the long term, Khizou said, however saying this trust is certainly only for those investors seeking dedicated exposures to miners due to its exposure to significant risks. The trust is currently trading at a 16.4% discount.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BlackRock Gold and General A Acc1,193.05 GBP-0.66Rating
BlackRock World Mining Trust Ord643.19 GBP1.77Rating

About Author

Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk