Gold Funds Record Inflows Fuelled by Market Fears

Gold ETFs have seen inflows of billions of pounds since the beginning of the year - more than at the last gold price peak. So what is driving investors towards the precious metal?

Emma Wall 29 July, 2016 | 8:00AM
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Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Chris Mellor from ETF provider Source.

Hi, Chris.

Chris Mellor: Hi, Emma.

Wall: So, we're here today to talk about the investors' favorite; gold. And it's been extremely popular this year, hasn't it?

Mellor: It's been really quite incredible. I don't think we've seen a more unusual period of inflows for our gold products since it was launched back in 2009. We've had roundabout $1.5 billion of inflows year-to-date of which roundabout $1 billion came in the first quarter alone. So, there has been a big swing towards reinvesting in gold once again after a couple of years in doldrums.

Wall: So, give us a comparison then. You say $1 billion in the first three months of 2016. That's comparable usually to about an entire year of inflows, isn't it?

Mellor: Yeah, exactly. As I say, the product has been there since 2009. It was there throughout the last period of rising gold prices and the biggest year we did was just over $1 billion of net new assets flowing into the fund back in those years. As I said, in one quarter we've done that and this quarter passed we've done another $0.5 billion as well.

Wall: And this is not just unique to your ETF. It has happened across the ETF sector spectrum. Gold has seen an incredible amount of money flowing into those passive products. What do you think the driver of this sort of flood to gold is?

Mellor: I think, if you look at when it started, it's almost perfectly correlated in inverse, if you like, to the equity markets at the start of this year. We saw a big sell-off in January and February and that was when we saw a real urge towards gold. In particular, flows built up very rapidly from February onwards. It's because gold is a natural sort of diversifying asset in the portfolio. If you're worried about the future, if you're worried about growth, it's a natural place to hide and a sort of safe heaven asset, if you like.

Wall: But this is not the first time that equities have sort of tripped up over the last five years, is it? If we look back over the last couple of years, we've had the Euro crisis led by Greece, last summer China dragged markets globally down. So, what's so special about 2016 that gold is suddenly so popular?

Mellor: I think what's changed is to a degree it's about what the other opportunities are out there. During the Euro crisis, as you mentioned, during last year's problems in the second half of the year we didn't see the same sort of moves in gold partly because we didn't have the same sort of moves in market in other assets, but also partly because the gold price was still in a sort of long-term trend decline from the peaks back in 2012-2013 and it looks as though there is a point at which gold prices are bottoming out and investors are coming back in.

I think the other thing that's important is how aggressive some of the moves were in the market in January and February. It was a pretty shocking start to the year for most investors. And the large institutional investors that we talk to, who invest in our product, are using coming back to gold, if you like, having been reminded of the risks that are out there by January and February's price moves.

Wall: And you mentioned there the gold price. Back when we saw the last peak, it was 18-something and now it's around 1325. So, are you suggesting that we could have another 50% up from here or do you think those highs that we saw a few years ago are just unobtainable?

Mellor: You can never say never, can you? The circumstances back in when the gold price was north of 1800 are pretty unusual post the financial crisis and during the Eurozone, the first round of the Eurozone crisis. If you see economic events and a backdrop like that then, yes, there is no reason why gold can't go back to those kind of prices. I think most investors buying today aren't expecting that.

I guess it's a hedge against the worst of the risks, but it's also, I think, a hedge against just weaker growth, worse of economic outcome than people are expecting and the Brexit vote back at the end of June, the surprise there has induced to get more inflows into gold as people realized that this isn't a smooth process of economic recovery. Where are we seven or eight years on from the financial crisis again?

Wall: Chris, thank you very much.

Mellor: You're welcome.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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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Emma Wall  is former Senior International Editor for Morningstar