Volatility in haven metal market is on the increase as inflation expectations and low interest rates fuel investor rush
With the uncertainty in global financial markets and economies this year bolstering the case for haven metals, a lot of gold bugs might be starting to sound like that insufferable friend who brags about liking a certain artist before they were cool. But as more capital flows into the space through ETFs, some are saying that the party’s getting a little crowded.
The most obvious drivers of demand, as noted in a recent article on ETF.com, is the plunge in interest rates that make zero-income haven assets like gold relatively more desirable. That point looks even stronger when one looks at the decline in real yields in treasury inflation-protected securities (TIPS), which recently dropped to -0.97% for 10-year TIPS – suggesting that investors in Treasuries are expected to lose money.
“Due in large part to trillions of dollars’ worth of stimulus programs unleashed by U.S. fiscal and monetary authorities, investors’ inflation expectations have risen,” the ETF.com report said. “However, interest rates have not been able to adjust upward in turn due to the Fed’s massive bond buying program.”
A major catalyst behind the strong price swings have been gold-backed ETFs, which according to the World Gold Council have seen US$50 billion in inflows so far this year – over four times the pace recorded last year. The funds have apparently become investors’ vehicle of choice for gold exposure, as they have accounted for 35% of total gold demand in 2020 and helped offset a 46% decline in demand for gold jewelry as well as a 39% weakening in central banks’ purchases.
Against that backdrop, the Wall Street Journal reports that gold futures are within striking distance of historic highs. Assets managed by the SPDR Gold Shares and iShares Gold Trust ETFs have swelled 60% this year, and smaller ETFs have seen even bigger AUM increases.
At the same time, volatility has also ramped up, with gold recording more drastic daily swings. It has seen daily moves in the neighbourhood of 1.2% over the past five weeks, nearly doubling the typical swing since the start of last year. There have also been sporadic falls as gold slide around 4.5% on August 11 and roughly 2% last Wednesday, with no obvious explanation in both instances.
Some traders say that the more rampant use of ETFs have made price swings in gold more pronounced, which could lead to a more intense boom-bust cycle for gold.
“Because of the very high interest in ETFs by retail investors, you might see swings that you haven’t in the past,” Ellen Hazen, a portfolio manager at F.L.Putnam Investment Management, told the Journal.
