After a significant hiatus, North American investors are once again taking the lead in the gold rally, evidenced by a robust demand for exchange-traded funds (ETFs) in September. The World Gold Council (WGC) reported that global gold-backed ETFs saw an inflow of 18.4 tonnes of gold, valued at approximately $1.4 billion, marking the third consecutive month of positive investor interest.
“Continuous inflows in recent months have transformed year-to-date (y-t-d) outflows of global gold ETFs into a positive $389 million,” the analysts noted in the report. Notably, North American funds have also seen positive flows this year, while European funds remain the only region experiencing outflows.
North American-listed funds attracted an impressive $1.36 billion, accounting for the bulk of market activity. This surge in demand is attributed to the Federal Reserve’s recent decision to cut interest rates by 50 basis points and signal a new easing cycle, potentially lowering rates to 3% by 2026.
“Lower opportunity costs associated with interest rates and the dollar have increased investor interest in gold ETFs,” the report indicated. Additionally, the rising gold price not only drew investor attention but also triggered significant inflows from in-the-money call options of major gold ETFs. Furthermore, escalating geopolitical tensions in the Middle East have led investors to seek gold as a safe haven.
In contrast, European gold funds experienced outflows of 1.7 tonnes, valued at $244.9 million. Analysts attribute this trend to diverging monetary policies between the Federal Reserve and the Bank of England (BoE). The BoE maintained its rate at 5% during its September meeting, focusing on inflation risks from high wage growth, which dampened investor expectations for future rate cuts. This cautious approach led to a notable increase in UK gilt yields, coinciding with the outflows from local gold ETFs. However, Germany and Switzerland reported minor inflows, likely fueled by safe-haven demand amid a deteriorating economic outlook.
Asian-listed funds, although relatively small, have shown remarkable consistency, with holdings increasing by 2 tonnes, valued at $175 million, in September. This marks 20 consecutive months of net inflows in the region. Analysts noted strong inflows from India, driven by factors similar to previous months, along with strong gold price momentum and heightened geopolitical risks. Meanwhile, Chinese inflows remained modest as the local equity rally, spurred by aggressive government stimulus, drew some attention away from gold.
Looking ahead, the World Gold Council anticipates continued growth in gold prices as the Federal Reserve maintains its rate-cutting trajectory. “Historically, gold has returned an average of 6% in the six months following the initiation of rate-cutting cycles,” the report stated. With high equity-bond correlation and shifting macroeconomic conditions, gold offers diversification and a hedge against broader portfolio risks. This is further supported by central bank purchases, rising demand from key markets like India, the re-engagement of Western ETF investors, and the recent escalation of tensions in the Middle East.
However, investors should brace for potential volatility. A strong September employment report revealed robust growth in the U.S. labor market, leading to a rapid shift in monetary policy expectations. Following the report, which indicated the economy added 250,000 jobs last month, markets adjusted their expectations from a 30% chance of a 50 basis point rate cut to a 90% probability of a 25 basis point cut, with a 10% likelihood of no rate cut.
Gold prices have faced challenges in this shifting environment, with December gold futures last trading at $2,629.10 per ounce, down more than 1% on the day.
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