Going for gold: passive flows and price fluctuations

This article is part of
Alternative Investments - September 2014

“But increasingly, thanks to the growth of exchange traded products, the gold price is determined by the actions of financial traders and that appears to have exacerbated its volatility.”

ETP outflows

So it seems investors are gaining exposure to gold through passive products and that this has the potential to be a growing market. Analysis of the European ETP market by Morningstar for the first half of this year exposes a less positive trend, however.

While the European ETP market saw inflows of €22.9bn in the first six months of 2014, commodity and money market ETPs experienced “mild” net outflows during the period of €200m each. Morningstar identifies that gold, “safe haven and pricey products” also fell out of favour with investors in the first half of the year.

Jose Garcia-Zarate, senior ETF analyst at Morningstar, observes: “Where we have seen outflows this year, it’s notable that ETP investors are moving out of some of the popular but pricier ETPs.

“Given the eroding effect of costs on long-term investment returns, it is very encouraging to see that ETP investors are actively discriminating products in cost terms.”

Other factors could be behind the outflows recorded by the gold ETP market, as Chris Beauchamp, market analyst at IG Group, points out. He cites the increasing trend among investors to hunt for income as opposed to investing in what are regarded as ‘safe haven’ assets.

“Faced with an asset designed to provide safety in emergencies, and ones that provide a yield, most [investors] have sensibly chosen the latter, and outflows from gold ETPs confirm this,” he reasons.

Where is the price going?

The geopolitical tensions in Russia and Ukraine had been driving investors back into gold but the easing tensions in the region at the same time as a strengthening US dollar does not bode particularly well for the asset.

Nevertheless, Daniel Fisher, chief executive at Physical Gold, which provides gold bullion into UK self invested personal pensions, believes that gold has “found momentum”, which will continue into the second half of 2014.

He adds: “The Indian wedding season tends to push the gold price higher more often than not, so we expect third quarter demand from the sub-continent to combine with the macro elements to provide sustained price growth for precious metals enthusiasts.”

The outlook for gold and commodities certainly seems mixed but ETPs could provide an alternative way for investors to exploit these asset classes. Some of the negative news flow may also present a buying opportunity for some investors.

While passive strategies like ETFs and ETCs may not find a place in every investor’s portfolio, for others these products offer diversification. Certainly, the growth of gold ETFs suggests that they are finding favour among UK retail investors.