Stretched equity valuations triggering gold ETF inflows

Nov 21st, 2017 | By | Category: Commodities

Stretched equity valuations have prompted the fourth consecutive week of inflows into gold ETFs, according to the latest ETF Securities’ fund flows report – a weekly analysis of capital flows across the firm’s entire ETF range.

Stretched equity valuations triggering gold inflows, says ETF Securities

ETF Securities notes that gold ETF inflows are being driven by a desire to hedge a potential equity market correction.

Inflows into the firm’s long gold ETFs totalled $24.1 million during the week ended 17 November 2017. The past ten weeks have seen total net inflows of $508m, with only two weeks of net outflows during this time. The firm writes that uncertainty over the ability for equity markets to continue their stellar rally has led investors to look for ways to hedge a potential correction.

ETF Securities’ blockbuster gold product is the ETFS Physical Gold (PHAU LN) which has $6.2 billion in assets under management (AUM) and management fees of 0.39%.

Commenting on the gold price outlook, Martin Arnold, director, FX and macro specialist, ETF Securities, commented: “Although we expect the Fed to continue to tighten policy, we think the downside risks to gold prices are fairly limited as real interest rates will remain depressed as inflation gains pace in the US. However, a shock event could force gold prices higher, making it an attractive defensive asset to add to a diversified portfolio.”

Elsewhere in the commodities space, ETF Securities reports that its crude oil ETFs experienced their eleventh consecutive week of outflows as investors continued to take profits, despite crude oil prices losing around a third of the gains seen over the past month – suggesting that geopolitical risk premium is beginning to dissipate.

Arnold said: “Downward price pressure is also still being exerted by rising supply, particularly in the US. Crude production spiked to a second consecutive weekly record level (the highest since the Energy Information Agency’s data began in 1983) last week, highlighting the profitability of production at current price levels. Investors will be closely monitoring OPEC comments leading up to its end-November meeting, if the cartel does not follow through with an extension of production cuts, further downside in crude prices is likely.”

Over the past 11 weeks, investors have withdrawn $434m from the firm’s long oil ETFs, such as the $722m ETFS WTI Crude Oil (CRUD LN) and the $315m ETFS Brent 1mth (OILB LN).

Turning to the firm’s currency-based ETFs, ETF Securities highlights that the short US dollar ETFs that it offers have received their largest inflows for ten weeks, totalling $11.3m, with the vast majority of these inflows against the euro – the ETFS Short USD Long EUR (XBJQ LN) now has AUM of €28m with a management fee of 0.39%. According to Arnold, the market “appears to be discounting the ability of the Fed to hike rates in an appropriate timeframe to counter rising inflationary pressures and engineer a steepening of the US yield curve.”

He continued: “With 2018 being a year of change at the Fed, and the top three central bankers relinquishing their positions, there is an increased risk of a policy error. Positioning in the futures market is also stark: with the exception of the Japanese yen, the US dollar remains the least favoured major currency compared to its long-term average, with net investor positioning hovering just shy of record low levels.”

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