Exchange-traded funds (ETFs) backed by traditional safe-haven gold have experienced a gradual decline in appeal this year, as receding fears of a U.S. economic slowdown, rising bond yields, and robust equity performance have diminished the attractiveness of the precious metal. Despite the presence of sticky inflation, gold ETFs have seen their overall holdings decline, reflecting a shift in investor sentiment.
According to data from the World Gold Council (WGC), the total holdings across more than 100 gold ETFs fell to 3,348 metric tons as of August 18, marking their lowest level since April 2020. Notably, the largest ETF, SPDR Gold Trust, witnessed holdings diminishing to levels comparable to those seen before the pandemic.
Historically, investors have turned to gold as a safe-haven asset during times of economic uncertainty and rising inflation. This was evident in May when gold prices surged to nearly record highs amid the U.S. regional banking crisis. However, since then, gold prices have retreated by approximately 9% to reach five-month lows around $1,890 per ounce.
Ross Norman, Chief Executive of Metals Daily, observed that gold has lost favor as a hedge against economic uncertainty for many institutional investors. Recent U.S. economic data has introduced uncertainty about the likelihood of further interest rate hikes by the U.S. Federal Reserve, while also raising the possibility of a “soft landing” for the U.S. economy.
Equities have demonstrated stronger performance than gold, even in the face of higher interest rates. Concurrently, safe-haven Treasury bonds have attracted investors away from gold, which lacks the earning potential of interest or dividends.
Despite these challenges, gold’s year-to-date return stands at 3.5%, though it falls short of the 13.8% from the S&P 500 and the 11% from benchmark 10-year U.S. bond yields.
Philip Newman, Managing Director of Metals Focus, pointed out that while some investors have exited the ETF space, there remains a positive view of gold as an asset diversifier. The precious metal has maintained its value in monetary terms, contributing to the understanding that there hasn’t been an imperative need to maintain positions in ounces.
Nonetheless, gold’s current representation in global financial assets, excluding central bank holdings, is approximately 1%, a notable decline from the around 5% it held during the inflationary period of the 1970s, according to WGC data. This shift in allocation underscores the evolving dynamics of investment preferences in a changing economic landscape.
