Global gold-backed ETF outflows contracted by 4%

2022 likely increase the need for a high-quality liquid asset such as gold

Physically backed gold ETFs saw global outflows of 173 tonnes (t) (-US$9.1bn, -4.0% AUM) in 2021. Collective gold holdings were down 5% to 3,570t for the year, while assets under management (AUM) in value terms dropped 9% to US$209bn as net outflows were compounded by a 4% contraction in the gold price. 

Despite considerable outflows for the year, gold ETF holdings remain significantly above pre-pandemic levels, as they posted record inflows of approximately 875t (US$49bn) during 2020.

Losses in 2021 were driven by North American funds, which never recovered from their significant outflows in Q1, ultimately registering outflows of nearly US$11bn (-200t) by year-end. 

The bulk of these outflows were from large US funds whose assets fluctuated in tandem with the gold price. Conversely, European ETFs turned positive in the second half of 2021 amid rising inflation expectations, ending the year with marginal gains of US$264mn (0.7t).

Asian ETFs accounted for the vast majority of inflows among global funds, despite some weakness in Q2, adding close to US$1.5bn (20%) over the year.                                                                                                                                                         This especially rang true for Chinese-based funds, which made up more than 60% of total inflows for the region, driven by concerns over slowing economic growth and lower yield expectations as well as local investors taking advantage of a lower gold price.  

Finally, low-cost ETFs attracted consistent inflows regardless of the direction of gold prices, increasing by 45% (63t, US$3.7bn). These funds now constitute in sum almost 6% of the global gold ETF market.

December highlights: 

Gold ETFs experienced net outflows of 6.4t (-US$340mn) in December, consistent with monthly outflows during much of H2 2021. North American outflows of 22t (-US$1.2bn) outweighed inflows into Europe and Asia, which gained a combined 16t (US$942mn) during the month. Other regions saw negative flows for the first time since August, losing US$68mn (-1.2t). 

North American outflows once again stemmed from larger US funds, likely triggered by the US Federal Reserve (Fed) indicating its intent for multiple interest rate hikes in 2022 to combat decades-high inflation, while planning to scale back asset purchases early in the year.

   

 On the other hand, inflows into Europe continued despite the Bank of England’s decision to raise interest rates. Demand was also supported by a flight-to-quality as the Omicron variant of Covid-19 sparked renewed lockdowns.                                                                                                                         Inflows into Asian ETFs were primarily due to tactical buying in China after the local gold price fell in late November and early December.                                                                                                       Price performance and trading volumes:  Gold finished the year around 4% lower at US$1,806/oz.                                                                                                                                                          The gold price rallied into year-end on the heels of the rapidly spreading Omicron variant, likely prompting flight-to-quality flows, but it was not enough to offset losses from early 2021. After H1 – when it dropped by more than 10% – gold was range bound between US$1,700/oz and US$1,850/oz for much of the year. This was also reflected in gold’s realised volatility, which remained largely below its longer-term average of 16% after gold’s initial selloff during Q1.

Net long positioning, via the recent Commitment of Traders (COT) report for COMEX gold futures, oscillated alongside the gold price, falling to below 500t (US$27bn)6 in late March and rallying close to 900t (US$52bn) in mid-November as prices rose again. 

By the end of 2021 it had settled above 670t (US$41bn), markedly higher than its historical weekly average of around 500t (US$31bn). Our gold return attribution model suggests that gold’s performance in 2021 was driven, to an extent, by offsetting forces. Gold faced headwinds from, 1: higher bond yields, especially during Q1, 2: a stronger dollar – particularly in H2 2021 – relative to other developed market currencies.

Conversely, gold was supported by, A: concerns that inflation surprises would not be transitory & B: market volatility linked to continued Covid variants and varying lockdown measures.

2022 outlook:                                                                  Looking ahead, we believe gold will experience similar dynamics in 2022. The persistence of high inflation is still likely due to knock-on effects from Covid-induced monetary and fiscal policies, supply-chain disruptions, and a tight labour market.                                                                                                                                                            This, combined with high equity market valuations, potential new Covid variants, and a growing appetite for less liquid assets, could well result in more frequent market pullbacks and increased demand for gold as a portfolio hedge. Gold may also find continued support from consumer demand and central bank purchases, both of which continue to be important long-term drivers of performance.

On the contrary, gold may also face challenges if interest rates rise quicker than currently anticipated. In our view, however, despite potential rate hikes both nominal and real interest rates will remain low from a historical perspective. 

This, in turn, will continue to drive structural changes in the composition of investment portfolios and likely increase the need for a high-quality liquid asset such as gold.