Holdings in gold-backed exchange traded funds surged to their highest levels in six years last month, as investors ploughed almost $5bn into the precious metal as part of a so-called “fear trade” responding to mounting political risks.
Gold was one of the best performing assets in August, rising 8 per cent and hitting its highest level since April 2013, as US president Donald Trump announced further tariffs on China. Year to date, the price of the precious metal is up 19 per cent to $1,525 a troy ounce.
Investors bought a total of 101.9 tonnes of gold via ETFs last month, worth about $5bn, according to data compiled by Bloomberg, taking total holdings to 2,453 tonnes, their highest level since February 2013. It was the third consecutive month of net buying.
“The slowdown is happening; the question is does that end in a recession? And when do you think it ends in a recession? That is clearly one of the worries,” said George Cheveley, a fund manager at Investec.
Investors’ demand for gold has helped propel the largest gold-backed ETF, the SPDR Gold Shares, into the 10th-largest ETF in the US, according to Reuters, with assets under management of $43bn. The fund has narrowly outperformed the S&P 500 stock index so far this year.
Brian Jacobsen, a senior investment strategist with Wells Fargo Asset Management, said some of the buying had been prompted by what he called the “terror-trifecta trade”: betting on a fall in stocks and a rise in gold and US Treasuries.
“With all the troubles in the world, from US-China trade relations to the Brexit brinkmanship we’ve found a terror-trifecta trade to be pretty attractive,” he said.
The tumble in bond yields globally last month has only added to gold’s appeal, since it lowers the so-called “opportunity cost” of holding a metal that provides no yield, analysts said.
Traders are now expecting the US to cut rates in September. It is “just a question of how large this will be”, said Jon Butler, an analyst at Mitsubishi Corp, the Japanese trading house. “This should continue to put downward pressure on bond yields and make gold look more attractive to investors, plus further escalations in the trade wars will help haven sentiment,” he said.
Still, traders remain cautious on the dollar, which hit a new high for the year on Monday against a basket of major currencies, such as the pound and euro. A strong dollar is normally bad for gold, since the metal is priced in the currency, making it more expensive for foreign buyers.
That has already led some investors to take profits, with gold falling by about $29 since its peak of $1,554 on August 25, sparking fears of a further correction.
But Investec’s Mr Cheveley said any weakening of the US economy due to the damage from trade tariffs on China could quickly reverse the dollar’s current strength. “That could be the next bull factor for gold,” he said.
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