21st Century Business Herald reporter Chen Zhi Shanghai report The Federal Reserve is about to cut QE, and more and more investment institutions are beginning to leave the market from gold-backed ETFs.
On 28 October, the World Gold Council released its latest Global Gold Demand Trends Report, showing that during the third quarter of 2021, total global gold demand reached 831t, down 7% year-on-year and 13% month-on-month, mainly due to a small outflow of gold ETF positions.
Specifically, global gold-backed ETF holdings decreased by a total of 27t during the quarter.
Wang Lixin, CEO of the World Gold Council In China, pointed out that behind this, it is mainly the investment institutions in North America that are affected by the upcoming reduction of QE by the Federal Reserve and have phased down some gold-backed ETF positions.
A Wall Street hedge fund manager pointed out to the 21st Century Business Herald reporter that the Fed's reduction of QE has indeed caused Wall Street investment institutions to reduce their gold positions. The reason is that investment institutions have always believed that gold has a high negative correlation with the US real interest rate, when the Fed to reduce QE to make the US Treasury yield rise to drive the US real interest rate higher, gold will face greater downward pressure, investors leave the market early to hedge.
It is worth noting that the small amount of outflows from gold-backed ETFs has had a significant impact on the year-on-year change in total gold demand in the third quarter of this year, covering up the year-on-year growth in gold demand in other areas.
Fortunately, in the face of persistently high inflationary pressures, central banks' preference for gold continues unabated.
The data shows that in the third quarter of this year, the global central bank net purchase of gold 69 tons, this year the global central bank net purchase of gold close to 400 tons. Among them, the central banks of Brazil and India, which are facing greater inflationary pressures, have purchased gold in particular.
"High inflation can easily make people worry about the depreciation of their own currency, so the central bank can boost the credit of the currency and alleviate the people's worries by buying gold to some extent." The above-mentioned Wall Street hedge fund manager analysis. In addition, gold's safe-haven nature can also help central bank portfolios effectively avoid the risk of severe financial market turbulence brought about by the Federal Reserve's reduction of QE.
The above-mentioned hedge fund manager pointed out that the global long-term investment institutions do not seem to have a significant cut in gold, they believe that the Fed to reduce QE may only be a short-term risk event, must be for inflation pressure to continue for a long time "precautions", gold's anti-inflation properties, undoubtedly become an important driving force for long-term holding.
<h4>The respective abacuses of gold-backed ETF exiters and those who remain</h4>
"Compared with the third quarter of last year, this year's gold market can be described as a big change." A gold industry insider told the 21st Century Business Herald reporter bluntly that in the third quarter of last year, affected by the spread of the global epidemic, global funds poured into the gold market to hedge in the same season, and the holding of gold ETFs increased by 274 tons, while the restrictions on people's travel made physical gold sales such as gold jewelry fall into the bottom.
But in the third quarter of this year, the Fed reduced QE expectations strengthened, capital began to withdraw from gold-backed ETFs, while people's travel restrictions were relaxed, and physical gold sales such as gold jewellery rebounded by about 33% year-on-year.
Wang Lixin pointed out that these changes reflect the market effects brought about by the global economic recovery and the shift in monetary policy, that is, on the one hand, the vaccination process is smooth, more people go out of their homes to increase physical gold consumption; on the other hand, after the economic recovery, many central banks consider tightening monetary policy, and funds begin to withdraw from the gold ETF market.
The aforementioned Wall Street hedge fund manager said that many North American investment institutions have cut their positions in gold ETFs, on the one hand, they are worried that the Fed's reduction of QE will put more downward pressure on gold prices, on the other hand, gold has been fluctuating between $1700-1900 this year after hitting a record high of $2083 / ounce at the end of August last year, lacking a strong money-making effect, investors are more willing to invest funds in high-yield assets such as US technology stocks.
Louise Street, senior market analyst at the World Gold Council, pointed out that although some investors have cut their positions in gold-backed ETFs this year, the outflow of gold-backed ETFs is not large in comparison, because the total holdings of gold-backed ETFs are still hovering around the all-time high of 3592t.
Wang Lixin believes that this shows that many long-term investment institutions still choose to "trust" gold, especially in the current high inflation pressure, these investment institutions still believe in gold's anti-inflation properties, which can help them reduce the risk of asset portfolio volatility and obtain stable returns.
<h4>Why do global central banks continue to increase their gold holdings? </h4>
It is worth noting that in the face of rising global inflation pressures, the enthusiasm of global central banks for gold purchases in the third quarter has not decreased.
In the third quarter of this year, the global central bank bought 69 tons of gold, and the net purchase of gold by the global central bank this year is close to 400 tons. The World Gold Council forecasts that the final net purchase of gold by central banks around the world this year will remain close to the average level of the past five years – around 470t/year.
Among them, the central banks of countries experiencing high inflationary pressures are particularly motivated to buy gold. For example, Hungary, Turkey, Brazil and India have all bought gold in large sums this year.
Behind this, one is that increasing the holding of gold will help reduce the volatility of its foreign exchange reserve portfolio, thereby more effectively avoiding the impact of the sharp fluctuations in the financial market caused by the Fed's reduction of QE, and second, this move also plays a role in stabilizing people's hearts.
"Global inflationary pressures remain high in the fourth quarter, and the market expects more emerging market countries facing high inflationary pressures to join the camp of increasing gold holdings." Especially in the case of the Federal Reserve's reduction of QE and the downward pressure on the exchange rate of the national currency, the importance of increasing gold holdings to boost people's confidence in the national currency is more critical. The aforementioned Wall Street hedge fund manager pointed out.
It is worth noting that in the context of the continuous increase in the global demand for various types of physical gold consumption, gold supply has also begun to continue to rise.
A gold miner told reporters that as more and more gold mining returned to normal due to the promotion of vaccination, the supply of gold mining in the third quarter has reached a record high of about 960 tons.
"The main reason why the total gold supply in the third quarter was flat with the same period last year was that the lower gold price led to a year-on-year decline in the supply of old gold recycling by more than 12%." The gold miners mentioned above pointed out. However, as the mining of major gold mines continues to increase, the supply and demand relationship in the gold market will be effectively guaranteed in the future, and it is unlikely that there will be a shortage of supply and demand for commodities such as copper, crude oil and coal.
"The biggest variable affecting the rise and fall of gold prices in the future is how much investment funds will pour into the gold-backed ETF market as an effective measure to hedge against high inflation risks." He pointed out.
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