20 January 2017
Gold ETF Regains Shine at the Start of 2017
  • Gold has gained every session but two since the beginning of 2017 on rising global geopolitical and economic risks, ranging from Trump’s policies, Brexit and currency weakness. The precious metal has risen about 5% since the start of the year, extending an advance of 8.1% in 2016. Gold price crossed the US$1,200/oz mark on 16 January, the first time since late November.
  • According to the World Gold Council’s 2017 Outlook (click here for report) published 13 January, not only will gold remain highly relevant as a strategic portfolio component, six key trends will support bullion demand throughout 2017 – heightened geopolitical risks, currency depreciation, rising inflationary trends, overvalued equity markets, long-term Asian growth and opening of new markets.
  • On SGX, the SPDR® Gold Shares ETF was the second-most active ETF by turnover in the January 2017 month-to-date, and the most active ETF in the 2016 calendar year.

Gold has gained every session but two since the beginning of 2017, on concerns over political and inflationary risks from President-elect Donald Trump’s policies, as well as the UK’s departure from the European Union. A weaker yuan and capital outflows from China also drove investors into bullion.

 

The precious metal has risen about 5% since the start of the year, extending an advance of 8.1% in 2016. Gold price crossed the US$1,200/oz mark on 16 January, the first time since late November.

 

UK Prime Minister Theresa May confirmed on 17 January that Britain will leave the EU while seeking a new arrangement on the customs union, while Trump will be sworn in as the next US president later today.

 

The commodity has historically been seen as a haven asset, an alternative to the US dollar and hedge against rising inflation.

 

In 2016, gold-backed ETFs increased their collective holdings by 536 tonnes (US$21.7 billion), the highest since 2009, according to data from the World Gold Council. While US-listed gold backed ETFs saw over 40% reduction in their gold holdings in 4Q 2016 – relative to the three previous quarters – UK, Asian, and Continental Europe-listed ETFs fell by just 14%, 9% and 1% respectively. Overall, Europe and Asia accounted for 57% of total ETF flows last year, the WGC noted.

 

According to the World Gold Council’s 2017 Outlook (click here for report) published 13 January, not only will gold remain highly relevant as a strategic asset – boosting returns and improving the risk-mitigation attributes of well-diversified portfolios, six major trends will support bullion demand throughout 2017.

 

  1. Heightened Political and Geopolitical Risks

Over in the EU, Netherlands, France and Germany will hold key elections in 2017, while Britain is still negotiating its exit. Jim O’Sullivan, Chief US Economist of High Frequency Economics, noted that in the US, there is “a meaningful risk that negotiations on trade will turn belligerent" and suggested that “confidence in markets could be affected by geopolitical tensions triggered by the new administration”.

  1. Currency Depreciation

Monetary policy is likely to diverge between the US and the rest of the world, with the Federal Reserve widely expected to continue raising rates through 2017. However, it is uncertain if other central banks, such as the European Central Bank, may be willing and/or able to do so. John Nugée, former Chief Manager of the Reserves of the Bank of England and Director at the European Investment Bank, noted that this policy divergence could lead to downward pressure on currencies such as the euro and the pound.

 

  1. Rising Inflation Expectations

An upward inflationary trend is likely to support demand for gold for three reasons: first, gold is historically seen as an inflation hedge; second, higher inflation will keep real interest rates low, which in turn makes gold more attractive; third, inflation makes bonds and other fixed-income assets less appealing to long-term investors.

 

  1. Inflated Stock Market Valuations

Gold’s role in boosting portfolio resilience and diversification, as well as functioning as a tail risk hedge, is particularly relevant in the current environment, where a number of equity markets have seen significant rebounds or hit historical highs. Until now, investors have used bonds to protect their capital in the event of a stock market correction. As interest rates rise, this is a less viable option.

  1. Long-term Asian Growth

In Asian economies, gold demand is closely correlated to increasing wealth. As Asian countries become richer, their demand for gold increases. The combined share of world gold demand for India and China grew from 25% in the early 1990s to more than 50% by 2016, while other countries such as Vietnam, Thailand and South Korea also have vibrant bullion markets.

  1. New Markets

Gold is becoming more mainstream. China has seen dramatic growth in recent years through its Gold Accumulation Plans – physically settled gold contracts in the Shanghai Gold Exchange, while in Japan, pension funds have increased their gold holdings over the past few years. In 2016, one significant development stood out – The Accounting and Auditing Organisation of Islamic Financial Institutions (AAOIFI), with support from the WGC, launched the Shari’ah Standard for Gold, opening up the Muslim world to gold investment. Whereas previous Shari’ah rulings were fragmented or non-existent, the Standard provides definitive guidance on gold products, potentially allowing millions of Muslims to invest in gold.

 

On SGX, the SPDR® Gold Shares ETF was the second-most active ETF by turnover in the January 2017 month-to-date, and the most active ETF in the 2016 calendar year.

 

2017 Month-to-Date Performances

 

The five most active ETFs on SGX in the January month-to-date were iShares MSCI India Index ETF, SPDR® Gold Shares ETF, SPDR® Straits Times Index ETF, db x-trackers MSCI Thailand Index UCITS ETF (DR) and db x-trackers MSCI Korea UCITS Index ETF (DR).

 

In the MTD, these five most active ETFs averaged a total return of 2.4%, taking their one-year and three-year total returns to 20.4% and 16.2% respectively.

 

The above-mentioned ETFs saw a  125.9% YoY rise in turnover for the month, increasing from S$81 million in January 2016 to S$183 million in the same period this year. This brings the total 12-month turnover to S$1.9 billion.

 

The five most active ETFs in the MTD are detailed below in Singapore dollars and sorted by MTD turnover.

 

Names

Stock Code

MTD Turnover 2017

MTD Turnover 2016

YTD Turnover 2017

YTD Turnover 2016

12M Turnover

iShares MSCI India Index ETF

I98

81,995,903.35

21,286,377.29

81,995,903.35

21,286,377.29

608,788,065.14

SPDR® Gold Shares ETF

O87

53,397,544.03

16,639,949.69

53,397,544.03

16,639,949.69

794,149,515.86

SPDR® Straits Times Index ETF

ES3

33,456,713.00

38,913,583.00

33,456,713.00

38,913,583.00

366,607,824.00

db x-trackers MSCI Thailand Index UCITS ETF (DR)

LG7

7,043,012.84

3,378,777.15

7,043,012.84

3,378,777.15

91,667,992.50

db x-trackers MSCI Korea UCITS Index ETF (DR)

IH2

6,910,646.40

740,934.33

6,910,646.40

740,934.33

33,056,271.24

Source: SGX, Bloomberg & SGX StockFacts (data as of 19 January 2017)

 

Names

Stock Code

Total Return MTD %

Total return 12M %

3 Year Total Return Annualized %

3 Year Total Return %

30 day Volatility

Total Return YTD %

iShares MSCI India Index ETF

I98

1.0

12.5

8.1

26.4

16.8

1.0

SPDR® Gold Shares ETF

O87

2.6

8.6

2.0

6.1

12.5

2.6

SPDR® Straits Times Index ETF

ES3

4.4

21.2

1.9

5.7

9.0

4.4

db x-trackers MSCI Thailand Index UCITS ETF (DR)

LG7

0.0

33.1

8.1

26.4

11.6

0.0

db x-trackers MSCI Korea UCITS Index ETF (DR)

IH2

3.8

26.6

N/A

N/A

15.7

3.8

Average

 

2.4

20.4

5.0

16.2

13.1

2.4

Source: SGX, Bloomberg & SGX StockFacts (data as of 19 January 2017)

 

ETFs are investment funds listed and traded intraday on a stock exchange. The majority aim to track the performance of an index and provide access to a wide variety of markets and asset classes, including local stocks, international securities, bonds, commodities or money markets.

 

Each ETF gives investors access to the performance of the asset that comprises the underlying index. Investing in the ETF is also less costly if one was to build a similar portfolio by buying the individual stocks. It also provides exposure to international markets and asset classes that may be inaccessible to individual investors.


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