Net fund flows into global gold ETFs in the first half are already higher than during the same period in 2009.
As the UK government negotiates a break up with the European Union, investors are likely to look for risk-off trades and gold will benefit as a safe-haven asset, according to Robin Tsui, ETF gold specialist at State Street Global Advisors.
Uncertainties
“The uncertainties that Brexit brings to the financial markets include whether Scotland or Northern Ireland would want to be independent from the UK and rejoin the European Union. The role of gold becomes more important to investors, who are parking money in gold as a safe-haven asset,” Tsui told International Adviser’s sister publication Fund Selector Asia.
Before Brexit, Tsui said the firm’s forecast for the price of gold price was $1,350 (£1,042, €1,222) by year-end. After Brexit, they have adjusted the forecast, based on one rate hike in 2016 in the US, to $1,450-$1,500 by year end.
“If you look at this year, the biggest driver for the gold price is the US dollar."
“The uncertainties would depend on whether the UK and also the EU would be pushing more stimulus measures to stimulate growth. We think this is possible, as they want to drive growth in their respective markets. If that happens, that would be positive for gold because if currencies in Europe depreciate, investors could buy gold as an alternative liquid currency in the coming months. At least until the UK government comes out with feasible solutions to tackle the situation going forward.”
With $14trn in global sovereign debt already paying negative interest, gold will become more relevant to portfolio managers looking to replace negative yielding bonds with gold, he said.
Net flows
The net flows into global gold ETFs have been quite positive and substantial, he said.
In the first half, on a global basis, the net inflows into gold ETFs amounted to $13bn, while during the first six months of 2009, the figure was $11bn, he said.
Tsui said net capital flows into his firm’s gold ETFs are currently up 48% from 1 January. After Brexit, net inflows into the SSGA Gold Share ETF increased by $1.6bn in one week.
“It gives you the impression that investors are very worried about the current state of the global economy.”
He said it is possible that gold prices could reach $1800 in five years. “We don’t want to see a big rally, like what had happened in 2009 when the gold price increased to $1900 from $800. We want to see a gradual increase such as $100 per year. We want to see a fundamental increase, not an increase driven by hot money.”
Gold – dollar link
The US dollar also plays a role in supporting the price of gold, he said.
“If you look at this year, the biggest driver for the gold price is the US dollar. If there are more rate hikes, the US dollar would rise. The dollar has not been that strong this year compared to the past three-to-four years. If it goes down, that would be positive for gold as it would be cheaper for investors to buy gold to hedge their exposure.”
“We won’t be surprised if net inflows into gold share ETFs would be higher than that in 2009. If the pattern continues, it will be a record year.”
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The SSGA-SPDR Gold Share ETF has been rising since the start of 2016.
Source: FE Analytics
