Global gold ETFs: A popular gateway to the gold market (2024)

Table 1: Regional funds and assets

The rising investment demand for gold

Gold valuation can be intuitively thought of as an equilibrium pricing of supply and demand, driven by strategic and tactical positioning (Figure 1).

Figure 1: Main drivers of gold’s performance

Strategic demand is highlighted by:

• gold’s solid, long-term returns, driven by economic expansion
• its effectiveness in times of uncertainty as a hedging and diversification tool (Chart 13, p11, Appendix II, p10in the full report).

Tactical demand is driven by:

• gold’s relative attractiveness or opportunity cost
• momentum positioning that amplifies trends.

Many investors have come to understand these drivers and gained confidence in gold’s strategic role in portfolios, thereby strengthening global investment demand via gold ETFs.

The significant growth in gold’s investment demand constitutes a major pillar for the gold-ETF market’s rapid expansion. Global investment demand for gold has increased by more than 270% since the birth of gold ETFs in 2003, and reached 1,270t in 2019 (Chart 5, p5).

Global investors’ allocation to gold – mainly through gold ETFs – rose rapidly in 2020

Inflows into global gold ETFs have been the most vital driver of investment demand for gold in 2020 (Chart 2). Global gold ETFs collectively held 3,880t – a new record – as of September 2020, bringing the y-t-d global net inflows to 1,003t, or US$55.7bn, significantly higher than the largest annual inflows prior to 2020, both in tonnage terms (646t in 2009) and US dollar value (US$23bn in 2016).

With the COVID-19 outbreak spreading around the globe, many regions experienced sharp declines in their economic growth, leading to unprecedented expansionary monetary policies from major central banks. While the weakened economic growth and lockdown measures to contain the pandemic in major markets hampered global gold consumption, the rising risk and uncertainty reduced the opportunity cost to hold gold, and the bullish gold price momentum has fuelled gold’s investment demand so far in 2020. Through the third quarter of 2020, the global investment demand for gold reached 1,630t and is on track for record yearly levels on an annualised basis.

As a result, global investment demand for gold has outweighed gold consumption so far this year. In the first three quarters of 2020, investment demand made up 55% of total gold demand(Chart 5, p5). In comparison, the combination of jewellery demand and gold used in technology accounted for nearly 90% of total demand in 2003 globally, when the first gold ETF made its debut.5

Total cost of ownership plays a key role in gold investment choices

Investors can gain access to the underlying performance of gold in a handful of ways. Many investors prefer to hold gold in the form of bars and coins, while others actively trade gold futures and gold-relevant stocks, like gold miners. Considerations like portfolio sizing, rebalancing frequency, operational aspects, leverage, commissions, bid/ask spreads, storage and insurance costs and holding periods are just a few of the explicit and implicit costs an investor might use to formalise the total cost of ownership and ultimately their investment choice7(Figure 2).

Figure 2: Accessing gold can be accomplished several ways

Although gold futures, vaulted gold, mining stocks, and bars and coins remain very relevant and important investment tools, gold ETFs have attracted investors for several reasons. These include:

• Cost efficiency: While expense ratios of major global mutual funds with precious metal strategies range from 98 basis points (bps) to 456bps8, global gold-ETF management fees vary between 7bps and 297bps per year due to the economies of scale afforded by their structure.9 Many investors have shifted gold exposure to low-cost gold ETFs, using various funds listed in the US and Europe, many of which charge less than 20bps a year. This trend in gold ETFs is a by-product of the broader ETF market.
• Transparency: Gold ETFs hold gold bullion in a standardised form of quality, measured in troy ounces, kilograms, or grams. For instance, many gold ETFs around the globe exclusively hold London Good Delivery bars, each weighing approximately 400 troy ounces with a minimum fineness of 99.5%, based on the LBMA gold price. More recently, many funds, particularly in Asia, have linked their gold ETFs to newer benchmarks like the domestic price of gold in India10 and the Shanghai Gold Benchmark contracts in China. This has allowed local investors to have direct exposure to local gold pricing within their respective regions.
• Liquidity: Collectively, global gold ETFs’ trading volumes averaged US$1.8bn per day in 2019 and have nearly doubled to US$3.5bn per day so far in 2020 (Chart 6, p5), rivalling most stocks globally. Such a deep and liquid market enables retail investors to trade gold ETFs with minimal friction costs and is also capable of facilitating large trades for institutional investors. A deep and broad market has provided investors with an extra source of liquidity in times of distress, like the financial market sell-off witnessed in March 2020.11

Positive structural changes and increased availability

Structural changes have played a role in the evolution of the global gold ETF landscape. The establishment of the Shanghai Gold Exchange (SGE) created a fundamental opportunity for gold investment in China. And subsequently when China lifted its ban on retail bullion trading in 2004, the nation’s annual gold investment demand surged by 59 times between 2003 and 2013, partially contributing to the birth and expansion of the region’s gold ETF market.12

The increasing number of products listed outside of the US has enabled many non-US investors to gain access to gold ETFs(Chart 3). For instance, when the global financial crisis unfolded in 2007, over 80% of global gold ETF assets were concentrated in North America. Growing investor interest in gold as a strategic asset amid various economic and geopolitical uncertainties as well as regulatory support in local markets – for the listing of gold ETFs – have been vital drivers of the rising geographic diversity in the gold ETF market, with funds currently listed in 18 countries(Table 2, p6in the full report).13This has led to currency-hedged gold ETFs, which allow an investor to hold gold in a non-local currency of their choice.

Competition reduced premiumsand benefitted retail investors

The emergence of gold-backed ETFs has positively impacted the retail physical gold market. Prior to 2003, gold bars and coins were among retail investors’ primary choices to access the gold market. While storage – either paying a third-party to vault or bearing the cost directly – could be a major issue for many bar and coin investors, there were also extra expenses such as labour charges and other gold retailing costs. As the popularity of gold ETFs grew, their cost-effectiveness triggered additional competition in the retail market. While data for premiums on bars and coins is not always accessible, available data combined with anecdotal evidence suggests that as the gold ETF market has grown and developed, retail physical gold investment products in developed markets have experienced lower price premiums (Chart 4).14

Gold ETFs – the road ahead

Gold ETFs have gained popularity amongst investors across the globe since their debut. Global gold ETF total holdings have been expanding at 42% per year on average since 2003, and their trading volumes are near record levels. And all regions have witnessed significant growth in their respective gold ETF markets during the past 17 years. With the investment demand for gold rising rapidly in recent quarters, the unique features of gold ETFs, including cost-effectiveness, market depth, efficiency in tracking the spot gold price, safety of storage and the fact that they are securely backed by physical gold, have increased the attractiveness of these products’ markedly.

And as gold has become more relevant for retail investors the World Gold Council has helped establish the Responsible Guide to Retail Gold Investment (RGIP), (Focus 2, p11in the full report), aiming to guide investors to safe, transparent and efficient gold investment products.

Looking ahead, we believe investors’ confidence in the role of gold as a strategic asset could continue to strengthen. As the pandemic continues, its profound impact on social and economic activities globally has steered expectations for a V-shaped economic recovery towards slower paths. Against such a backdrop, economic uncertainties are likely to remain high, pushing up investor safe-haven demand. And as discussed in our Gold mid-year outlook 2020, while lack of fundamental support for the equity market’s current valuation-surge may lead to potential sharp pullbacks, the ultra-low-rate environment is limiting bonds’ effectiveness in reducing risks and providing returns, thus improving the opportunity cost of holding gold. Furthermore, as gold prices breach historical highs, the bullish momentum could continue to attract investor attention in different regions.

With economic and financial uncertainties remaining high, interest rates hovering at record lows, and the bullish price momentum attracting more attention, investment demand for gold could continue to rise through the remainder of 2020 and beyond, potentially offsetting the weakness in gold’s consumer demand and fostering continued gold-backed ETF expansion.

¹We define this universe as open-end, gold-backed ETFs or closed-end funds traded on exchanges whose shares are at least 90% backed by physical gold, as well as ETFs that hold baskets of precious metals and are adjusted for the percentage of gold. SeeGlobal gold-backed ETF holdings and flows.

²Gold Bullion Securities listed the first gold-backed ETF on the Australian Securities Exchange in 2003 (currently managed by WisdomTree), followed by Gold Bullion Securities in the UK later that year. The Central Fund of Canada did, however, provide a closed-end fund created in the 1960s that allowed for gold ownership beginning in 1983.

³Individual gold ETF funds are defined as funds backed physically by gold with individual International Securities Identification Numbers (ISIN)s. There are some funds with multiple share classes that may trade on different exchanges with different ISINs that are grouped together into a collective ‘fund family’.

⁴See Appendix I in the full reportfor more information.

⁵The remaining 10% was linked to bars and coins. At the time, central banks were consistent net sellers of gold and thus are not included in demand.

⁶Source: World Gold Council, Central Bank Statistics.

⁷We define total cost of ownership as a function of both explicit and implicit costs that have both objective and subjective qualities for each investor to consider.

⁸Based on data from 253 mutual funds with a precious metals strategy as of 30 September 2020 sourced from Bloomberg.

⁹Based on physical gold-backed ETFs we track as of September 2020.

¹⁰Domestic price of gold in India is the landed cost of gold, which can include inputs like taxes and duties, transportation, and manufacturing costs, etc. The local MCX gold Index includes the landed cost plus the premium or discount in the market and can be considered a close proxy to the domestic price of gold.

¹¹For more information on liquidity see Appendix II in the full report.

¹²Investment demand is calculated as the sum of demand for gold bars and coins and ETFinflows (which were not available until 2013) in China.

¹³As of 30 September 2020.

¹⁴Regions that have a few small or even no gold ETFs have not experienced the same premium reductions. However, it is possible that newer gold ETF markets like China and India could experience this effect as additional products create a more competitive landscape.

Important disclaimers and disclosures