USD-hedged gold helps risk-adjusted returns
Global gold-backed ETF holdings added 15 tonnes(t) to 2,484t in May. Europe and Asia drove inflows as European funds have responded strongly in the past two months. North American fund flows reversed their early 2018 trend as they lost 2.3% of assets, likely a result of the volatile prices in the gold market which left gold lower by 60bps (in dollar terms) on the month.
Volatility and weakness in the gold market were largely driven by a stronger dollar (DXY +2.3% on the month). However, USD-hedged gold was higher by 1.4% on the month. This highlights our view that having some allocation to USD-hedged gold helps risk-adjusted returns by lowering price volatility in periods when currency prices fluctuate.
Looking at regional fund flows, North American funds lost 30t (US$1.2bn, 2.3% of AUM) & European funds saw solid net inflows in May, growing by 26t (US$1.2bn, 2.8%). Total fund holdings in Asia rose by 21t (US$862mn) growing assets by 20%. Funds in other regions lost 2t or 6% of assets.
Individual flows at SDPR Gold Shares was the main driver of US and North American outflows losing 24t (US$1bn, 2.7%), while iShares Gold Trust also lost 2t (US$100mn, 80bp). Inflows in Europe were once again led by Xtrackers Physical Gold (23t, 74%) in Germany and Invesco Physical Gold (4t, 3.5%) in the UK.
Bosera Gold ETF, in China, continues to grow at a rapid pace adding 20t (US$822mn, 83%) driven by a combination of opportunistic buying and transfers from other non-listed Bosera funds. Huaan Yifu also added 1t (US$35mn, 5%).
Comparing Year-to-date trends it is to be said that, European inflows have caught North American inflows on the year, while Asian funds have grown 20%, led by Bosera Gold ETF which has grown 114%. Gold price volatility has been inversely correlated with North American flows.
After strong early-year performance, gold has given back much of its gains, remaining largely flat on the year, despite the USD rallying over 4% in the second quarter.
