Gold loses its lustre as investors chase reflation trades

Gold updates

Investors swapped gold for assets tied to the post-pandemic economic recovery in the first half of the year, leading to a 10 per cent drop in demand for the precious metal, according to a new report.

The World Gold Council said the decline was driven by gold-backed exchange traded funds, which had 129 tonnes of net outflows in the six months to June — the biggest decline since 2014 — as investors become less bullish about the metal and back reflation trades.

While sentiment towards gold picked up in the second quarter and consumer buying increased, it was not enough to offset the heavy outflows seen earlier in the year and gold demand fell 10 per cent year on year in the first half of 2021 to 1,833 tonnes, the report said.

Gold has continued to disappoint, failing to ramp up despite rising concerns about inflation and fears about a slowdown in growth due to the spread of the more contagious Delta variant of coronavirus. Gold has usually been viewed by investors as a hedge against broad-based price rises.

After rising to a year-high of $1,916 a troy ounce in May, it has fallen back to $1,827. Year to date, the metal is down 6 per cent and remains adrift of its record high of above $2,000 reached nearly a year ago.

“Gold is still lacking the support of ETF investors; they are continuing to wait on the sidelines and are apparently unwilling to buy gold,” analysts at Commerzbank wrote in a note. “For the gold price to begin making noticeable and lasting gains again, however, it needs this group of investors to buy.”

Investors are turning to other commodities such as base metals that are tied to economic growth, or other assets such as inflation-linked bonds, or equities to hedge against inflation, Rebecca Patterson, director of investment research at the hedge fund Bridgewater Associates, said in a webinar last week.

“When you have good growth, even though you have rising inflation, investors might say, ‘OK I want an inflation hedge but want to participate in this improving growth backdrop,’” she said. “So having a more diversified basket of commodities . . . along with the gold, you are going to be able to participate in that reflationary environment.”

Gold-backed ETFs only had “modest” inflows of 40.7 tonnes during the second quarter, said the WGC, as some investors became more concerned about the outlook for growth and inflation.

Consumer demand for gold in the form of jewellery, gold bars and coins has rebounded this year, the report said. It added that central banks remained strong buyers, purchasing a net total of 333.2 tonnes of gold in the first half of the year — 39 per cent above the five-year average for the period — driven by Thailand, Hungary and Brazil.

“We expect continued improvement in the consumer elements of demand for the rest of the year,” said Louise Street, senior markets analyst at the WGC, a market development body for the gold industry.

“And while ETFs will most likely not repeat the record performance of 2020, the need for effective risk hedges and the continued low-rate environment supports our view that investors will add to their strategic allocations throughout the rest of the year.”

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