Global uncertainty has made gold shine brighter despite gold exchange-traded funds (ETFs) registering $1.7 billion of outflows in June, according to the World Gold Council (WGC), the second consecutive month of outflows, but down from the $3.1 billion seen in May.

The WGC believes that gold will face two key headwinds during the second half of 2022: higher nominal interest rates and a potentially stronger dollar. However, the negative effect from these two drivers may be offset by other, more supportive factors, including high, persistent inflation with gold playing catch-up to other commodities; market volatility linked to shifts in monetary policy and geopolitics; the need for effective hedges that overcome potentially higher correlations between equities and bonds. In this context, gold’s both strategic and tactical role will likely remain relevant to investors, particularly while uncertainty stays elevated.

 

The WGC’s H2 2022 Outlook says that the rate hikes may create headwinds for gold, but many of these hawkish policy expectations are priced in, and concurrently, continued inflation and geopolitical risks will likely sustain demand for gold as a hedge. The underperformance of stocks and bonds in a potential stagflationary environment may also be positive for gold.

Investors face a challenging environment during the second half of 2022, needing to navigate rising interest rates, high inflation, and resurfacing geopolitical risks. In the near term, gold will likely remain reactive to real rates, driven by the speed at which global central banks tighten monetary policy in an effort to control inflation.

Ole Hansen, head of commodity strategy, Saxo Bank, said: “We believe that hedges in gold against the rising risk of stagflation together with traders responding to the highest level of inflation in 40 years, as well as turmoil in stocks and cryptos, are some of the reasons why gold has not fallen at the pace dictated by rising real yields. With that in mind, we are watching what investors do, not what they are saying, through the ETF flows.

During the past month when gold traded between $1787 and $1878, total holdings in bullion-backed ETFs have held steady within a narrow 13 tonnes range of around 3,265 tonnes. Any major (negative) change is needed for us to reduce our long-held bullish view on gold, and with that also silver.”

 

Global gold ETFs registered 28 tonnes ($1.7 billion) of outflows in June. This was the second consecutive month of outflows, following the 53t that left these funds in May. While the recent flows were enough to push Q2 into net outflows of 39 tonnes ($2 billion), year-to-date net inflows remained positive at 234 tonnes($14.8 billion). Total holdings at the end of June stood at 3,792 tonnes ($221.7 billion), up 6 per cent year to date.

North American and European funds were the only regions to see outflows in June. North American holdings fell by 26 tonnes ($1.5 b illion), with outflows dominated by the largest and most liquid US funds. Intense focus on the future pace of interest rate hikes and a stronger US dollar was the primary headwinds for gold investment.

European funds saw more modest outflows of 4tonnes (US$245mn), concentrated in Switzerland, Germany and France.

Despite the gloomy economic outlook for Europe, with record inflation and rising sovereign borrowing costs, the European Central Bank indicated it will raise interest rates in July – the first hike in more than 11 years – which weighed on sentiment. In the UK, holdings were up $205.4 million even as the Bank of England increased interest rates for a fifth straight month. Holdings in Asia rose fractionally (1tonne, $66.1million).

In China, the range-bound gold price and local equity strength discouraged greater levels of gold ETF investment. In India, minor net inflows continued in June, primarily driven by market volatility and a depreciating rupee attracting investment into Indian gold ETFs. Holdings in other region were virtually flat month-on-month. 

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