European funds now hold 1,121.4 tons of gold.
The WGC pinpoints three primary drivers of European gold investment.
- Loose monetary policy and negative yields. The warning lights have been flashing for some time: the global and European economy is slowing.
- Geopolitical uncertainty. Political uncertainty across the continent is also front and center of investors’ minds.
- Financial market performance and volatility. Over the past three years, European equity market performance has significantly lagged that of other major western markets
Net inflows of gold into European ETFs started in 2016 with a record 281 tons. That year turned out to be the beginning of a long-lasting trend. European funds added 149.7 tons of gold in 2017 and 90.8 tons last year.
Funds in the United Kingdom and Germany saw the biggest growth at the country level.
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UK funds led the way, accounting for about 50% of the total. Brits have dealt with the anxiety of Brexit by hoarding gold. The flow of gold into UK-based ETFs is part of a broader trend. British investors are also stocking up on physical metal. According to a statement by The Royal Mint, the demand for gold bars and gold coins spiked last December as uncertainty about the UK’s exit from the EU grew.
Germans have also been turning to gold as recession fears grow.
Interest rates continue to hover near zero throughout the EU. The European Central Bank never got around to taking any significant steps toward interest rate normalization after the Great Recession. In fact, last month the ECB relaunched a crisis-era bank lending program. The WGC said, “significant rate hikes are unlikely any time soon.”
The ECB’s QE purchases totaled somewhere in the neighborhood of 2.6 trillion euros. What did the EU get for all this stimulus? Not a whole lot. We have highlighted the “successes” of ECB QE. Even with the ECB’s half-hearted attempts at winding down the stimulus, it already looks like Germany – and a lot of other EU countries – is slipping toward an economic downturn. It’s no wonder European investors are turning to gold.
The WGC says it expects demand for gold in European ETFs will remain robust this year.
“Looking ahead, it is likely many of these trends will remain in place and support further growth in this part of the gold market. The Eurozone economy is faltering; a recession looks increasingly probable, as does further monetary easing by the ECB. Investors added another 20 tons in Q1 2019 in their continued search for a safe haven to protect their wealth in the face of these challenges.”
Inflows of gold into ETFs are significant in their effect on the world gold market, pushing overall demand higher.
ETFs are backed by physical gold held by the issuer and are traded on the market like stocks. They allow investors to play gold without having to buy full ounces of gold at spot price. Since their purchase is just a number in a computer, they can trade their investment into another stock or cash pretty much whenever they want, even multiple times on the same day. Many speculative investors appreciate this liquidity.
There are good reasons to invest in ETFs, but they aren’t a substitute for owning physical metal. In an overall investment strategy, SchiffGold recommends buying gold bullion first.
When considering gold-backed ETFs, you should always keep in mind that you don’t actually own the gold. Buying the most common ETFs does not entitle you to any actual amount of the precious metal.
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Cornelius Rupert T.
Cornelius Rupert T.