ETF boom fuels sharp rise in gold

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The 2020 gold rush in the markets is starting to worry even some longtime fans of precious metals. Gold futures are near record highs and up about 28% for the year, while silver has more than doubled since hitting its multi-year low in March. The measures are not entirely surprising, given the scale of the economic shock caused by the coronavirus and the offsetting global stimulus led by governments and central banks. Many investors fear economic stagnation, a surge in inflation, or a combination of the two – a recipe for growing demand for metals seen as a store of value in these difficult times. But the gold rush came with an increase in volatility that many traders are not happy about. Both metals have fallen about 6% or more from highs reached this month and are recording larger-than-normal daily swings, suggesting gold and silver have joined US tech stocks among the busiest transactions in the markets – creating the risk that months of outperformance could disappear in a day or two of frantic selling if the market or economic conditions change. “Almost everyone is talking about gold… It’s a warning signal of sorts,” said Luca Paolini, chief strategist at Pictet Asset Management, which holds more gold than its benchmark market index but could sell if volatility persists. “At least until the elections in the United States, this volatility will persist. ”

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Some traders blame the growing popularity of exchange-traded funds which allow retail and institutional investors cheaper and easier access to commodities such as gold, silver and other metals. They say that while ETFs like the SPDR Gold Shares Trust marketed by State Street Global Advisors have been part of the market landscape for more than a decade, the surge in gold and silver ETF purchases is expected to accentuate the fluctuations. price, potentially intensifying the boom. -bust cycle often seen in these and other products.

“Due to the very high interest of retail investors in ETFs, you might see fluctuations that you haven’t experienced in the past,” said Ellen Hazen, portfolio manager at FLPutnam Investment Management, who bought from gold via an ETF in March. Still, she believes the metal provides an effective long-term hedge against inflation.

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Gold-backed ETFs are experiencing the fastest growth on record and have raised nearly $ 50 billion this year, well above the previous record for annual entries, according to the World Gold Council. Assets managed by SPDR Gold and iShares Gold Trust stocks have grown by 60% this year, while smaller ETFs such as GraniteShares Gold Trust are growing at an even faster rate. Investors tend to invest in metals when they are worried about the economy and believe that inflation will rise faster than interest rates. Rising inflation reduces the purchasing power of the dollar, which means it takes more dollars to buy the same amount of metal. Low interest rates make metals, which offer no regular payments to holders, more attractive compared to income-generating assets such as safe bonds. Low inflation-adjusted interest rates have also improved stocks by making bonds less attractive, prompting many investors to take more risk on stocks. The trend explains how gold and stocks have rallied in tandem for months, with the S&P 500 hitting new highs last week.

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Gold has gained an average of 1.2% per day over the past five weeks, nearly double the typical swing since the start of last year. Money moves almost 4% per day on average, or about three times its normal daily variation. Metals also fell sharply on certain days with no obvious explanation – a sign of the view of many market participants that speculators are becoming a greater proportion of the market. On August 11, gold slipped about 4.5%, while silver fell 11%. And last Wednesday, both metals fell about 2%. Many precious metals ETFs are backed by physical gold and silver, but many traders claim that entries and exits also affect the futures markets, as ETFs have become so important that they represent a much of investor demand. Physical gold-backed ETFs held around 3,620 tonnes at the end of June, according to figures from the World Gold Council, more than any other country other than US Silver ETFs, ETFs also represent a significant share of investor demand. With physical demand for jewelry, bullion and coins declining, ETFs accounted for around 40% of global demand for gold in the second quarter, down from 6% in the same period a year earlier. When individuals buy shares of an ETF backed by physical gold or silver, they are buying an interest in a trust. The asset held by this trust is metal. One of the ways that traders create a market in the ETF – usually banks and other traders such as Virtu Financial Inc. – is to buy physical metal from traders in the open market, usually from banks, such as JPMorgan Chase & Co. and HSBC Holdings PLC, which routinely trade precious metals. As a result, large entries indicate that the metals are in high demand by global investors, a trend which then helps dictate sentiment in the futures market. Traders who sell to ETF traders may also seek to hedge against a price increase by buying futures contracts, creating another link between ETFs and metal prices.

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The trend can work in the opposite direction when money comes out of ETFs. When precious metals fell alongside stocks in March, traders said the fall was generally due to investors withdrawing silver from safe-haven metals to raise liquidity, and ETF exits had helped make the fall in gold even more severe.

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“I really believe this is pure speculation,” said Campbell Harvey, a finance professor at Duke University who argued that the widespread use of gold ETFs can cause prices to exceed market fundamentals. “There are people playing dynamic trading… If there is a turning point, they’re going to be crushed. – Joe Wallace contributed to this article.

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