Global Gold ETFs See Biggest Quarterly Outflow Ever

Includes: AGOL, GLD, IAU, SGOL
by: Tom Lydon

Searching for yield-generating and riskier equity assets on the brightening macroeconomic outlook, investors have redeemed an unprecedented amount of gold exchange traded funds over the second quarter.

According to ETF Securities, global gold ETFs experienced net outflows of $18.5 billion in the period between end of March through June, the largest quarterly sell-off since ETF Securities launched the first gold ETF in 2003, reports Francesca Freeman for the Wall Street Journal.

To put this in perspective, total commodity ETF outflows in the second quarter was $19.6 billion.

"There have been good, rational reasons for investors to be bearish on gold" in recent months, Nicholas Brooks, head of research and strategy at ETF Securities, said in the article.

Gold prices have slumped 23% during the second quarter. The metal experienced steep declines on speculation that the Fed would begin "tapering" its quantitative easing measure sooner rather than later.

"For many people, the challenge for going back into gold is that if quantitative easing is scaled back and you've got rising real interest rates, then gold doesn't look like a good investment," Deborah Fuhr, co-founder and partner at independent ETF research and consultancy firm ETFGI, said in the article. "Many people just don't see the case for gold, given that it's not an income-generating investment and many people are looking for yield."

Gold, a traditional safe-haven asset, has been favored during times of market volatility and uncertainty, but the recovering economy has fueled a rally in the equities market.

The precious metal does not yield anything, so it is less appealing in rising rate environment.

"Gold doesn't pay you anything," Andrew Cole, an investment manager at Baring Asset Management, said in the article. "We're largely in an environment where people are yield hungry, so you've seen flows into bonds and big income assets. It's also difficult to envisage an environment immediately ahead where we should get concerned about inflation to the extent that it will spark a desire for real assets. Against that environment, gold loses some of its luster."

Moreover, as the U.S. dollar appreciates, demand for gold, which is traded in USD, has shrunk in foreign markets.

The SPDR Gold Trust (NYSEARCA:GLD) saw $11.5 billion in outflows over the second quarter, the iShares Gold Trust (NYSEARCA:IAU) lost $1.5 billion and ETF Physical Swiss Gold (NYSEARCA:SGOL) saw $238 million in redemptions, according to IndexUniverse data.

Max Chen contributed to this article.

Full disclosure: Tom Lydon's clients own GLD.

Disclosure: I am long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.