World Gold Council: Low participation of US investors indicates that the upward trend of gold may continue

According to the Zhitong Finance and Economics APP, on April 17th, the World Gold Council stated in a document that in March, gold performed strongly, with changes in gold futures market positions and net inflows of North American gold ETFs driving gold prices to hit a historical high. The fundamental factors supporting the current rise in gold prices include escalating geopolitical risks, the trend of central banks stabilizing gold purchases, and strong demand for gold jewelry, bars, and coins. In addition, the prospect of future interest rate cuts indicates that gold ETFs have missed this rebound trend and are currently under-allocated. Recent inflows of North American gold ETFs and narrowing outflows of funds in European regions suggest a turning point is approaching. Gold currently has strong fundamental support, especially with low participation from American investors indicating that the upward trend in gold prices may continue, contrasting sharply with the situation in 2011.

In March, gold prices hit a new high of $2,214 per ounce, closing the month with an 8.1% increase. The stability of the US dollar has also reflected high returns in gold prices denominated in all major currencies that we track (Table 1).

Table 1: Gold prices in March hit a new high in US dollars, with strong performance in gold prices denominated in major currencies

Gold prices and returns denominated in major currencies *

* As of March 29, 2024. Calculations are based on LBMA afternoon gold prices denominated in the aforementioned currencies.

At the beginning of March, gold prices started to rebound, leaving some commentators puzzled about the driving forces behind it. Our Gold Risk Assessment Model (GRAM) shows that factors such as "risk and uncertainty" and "trend momentum" have driven the rise in gold prices (Figure 1). Particularly, in March, gold implied volatility surged, similar situations occurred in September 2022, March 2023, and October 2023, but this time the bond implied volatility (MOVE index) did not rise in sync, indicating a unique bet on gold. In terms of momentum factors, March was the third strongest month since 2019 in terms of net long positions in managed futures on the New York Commodities Exchange (COMEX). Gold ETFs in all regions except Europe saw inflows. As geopolitical tensions spread across multiple areas, the Geopolitical Risk (GPR) index also rose again. From a macro perspective, despite the upbeat market sentiment and the relatively mild monetary policy of the Federal Reserve, unexpected important intersections in US economic data suggest that stagflation risks may rise again (Figure 2), providing support for gold prices.

Figure 1: Geopolitical factors and speculative capital flows drive the rise in gold prices in March *

\* Data as of March 29, 2024. Our Gold Risk Attribution Model (GRAM) for short-term gold price performance is a multiple regression model on monthly gold price returns, incorporating four key drivers of gold price performance: economic expansion, risk and uncertainty, opportunity cost, and potential energy. These drivers reflect the motives behind gold demand, more importantly the motives behind investment demand. These are considered marginal drivers of short-term gold price returns. The "residual" contains other factors not yet captured by the model. The results here are based on analysis from February 2007 to March 2024.

Figure 2: US Data Unexpectedly Points to Stagflation

\* Daily data as of March 29, 2024.

Future Outlook

There has been an unprecedented disconnect between gold prices and global gold ETF flows (Figure 3), contrasting sharply with the current historical highs and the significant net inflows of ETFs in 2011.

We found that in March, the proportion of gold ETFs in the US market among various asset ETFs is much lower than it was 13 years ago, and also lower than the ideal weight in many people's minds.

The fundamentals supporting the current rise in gold prices include escalating geopolitical risks, a trend of central banks stabilizing gold purchases, and strong demand for gold jewelry, bars, and coins. Coupled with the prospect of future interest rate cuts, various signs indicate that gold ETFs have missed this rebound trend and are currently under-allocated.

India will hold elections in April. Market activity will be very limited during the six-week election period. In addition, India's wedding season will also be shortened, meaning that under similar conditions, Indian consumers should not have any potential gold demand to be released in June.

Figure 3: Unprecedented Disconnect

Global Gold ETF Flows and Gold Prices *

Gold Price Peaks Do Not Equate to Gold Holdings Peaks

As gold prices soar to historic highs, most people assume that gold positions may be very crowded, as was the case in 2011, but this is not the case.

When evaluating the proportion of gold ETFs to the total assets under management of all ETFs in the US market, we found that this proportion is at the fourth lowest level in history. While past performance does not necessarily predict future returns, it is worth noting that the last time positions reached such levels, gold's significant rally was indeed achieved with strong support from global gold ETFs (Figure 4) Similarly, we found that the open interest in the futures market follows a similar trend to the ETF sector; the open interest in gold is much lower than that of stocks, bonds, and commodity futures.

Despite the high gold price, we still believe that the current gold holdings are relatively low, and unlike previous rebounds, this time gold does not seem to have "peaked".

Chart 4: Unsatisfactory Gold Holdings

Gold and its proportion in total assets *

Facts and Illusions

Last month's news focus was on the inflow of Bitcoin (BTC) ETFs, with some reports claiming that investors are shifting from gold ETFs to Bitcoin funds.

We believe there is no data to support this claim, and we are not the only ones holding this view.

Global gold ETFs (especially those listed in Europe) started to see outflows even before the launch of Bitcoin ETFs, and the outflow rate did not accelerate after the introduction of Bitcoin ETFs.

Moreover, under the premise of flow measured in USD terms, the above flow situation is not significant. After all, investors allocate investments rationally based on total asset value, not on the number of ounces.

In recent weeks, both Bitcoin and the assets under management of gold ETF products in the US market have seen growth (Chart 5).

We believe that the outflows from gold ETFs and inflows into Bitcoin ETFs are speculative rather than structural, and our research confirms this.

It is not yet clear whether we are witnessing a turning point. However, there is evidence to suggest that there are more potential buyers than sellers of gold.

We also believe that the recent inflows into North American gold ETFs and the narrowing outflows from European funds suggest the arrival of a turning point.

Chart 5: Growth in Assets under Management of Bitcoin and Gold ETFs Year-to-date Comparison of Bitcoin and Gold ETF Assets under Management *

India Prepares for General Elections

India's general elections will be held on April 19th, lasting for 44 days and concluding on June 1st, conducted in seven phases. Due to stricter scrutiny on the flow of cash, gold, and jewelry during the election period, gold consumption is often affected.

There is evidence to suggest that stakeholders in various industries (gold traders, manufacturers, and jewelry retailers) tend to reduce transactions during this period.

Data shows that in three out of the past four general elections, gold consumption has decreased, with a decline in jewelry (accounting for over 70% of India's gold consumption demand) as well as demand for gold bars and coins. During the 2019 general elections, we did see an increase in gold consumption, but this was related to more auspicious days and a softening gold price at that time Summary

The price of gold is currently at a historical high, attracting significant market attention. For investors who believe they have missed the opportunity, holding assets at this level can indeed be challenging. However, our analysis indicates that gold currently has strong fundamental support, especially as the low participation of American investors suggests that the upward trend in gold may continue, contrasting sharply with the situation in 2011.

In addition to gold, prices of many other assets such as global stocks have also reached historical highs. The low proportion of gold in total assets is not only due to the continuous rise in prices of other assets but also involves a large issuance of financial securities. The physical supply constraints of gold mean that the price of gold must bear the responsibility of maintaining a reasonable proportion of assets. Currently, we have not seen this situation emerge, which is undoubtedly encouraging