Investors in Asia are poised to drive up the price of gold and related investments, most likely via exchange-traded funds, should the early period of the new US administration not go as planned, say market observers. 

Chinese investors are already buying up gold both directly and via ETFs, with the largest mainland ETF provider, HuaAn Fund Management, seeing a 40% rise in assets under management in the past six months, according to industry data (see charts below). 

Robin Tsui, Hong Kong-based gold specialist at State Street Global Advisors, which runs SPDR, the world’s largest gold ETF, expects more ETF gold products to be launched on Asian exchanges in 2017. But given the competitive landscape in Asia, with low margins and low volumes compared to the US and Europe, fund houses will need to come up with innovative ideas to compete, he said.

Gold investment overtook the 2015 total last year (4,375 tonnes compared to 4,361 in 2015), according to equity brokerage CLSA, but it was ETF demand that grew by far the strongest. This followed three years of falling demand for such funds.  

That said, trading volume for all gold ETFs listed in Hong Kong actually fell in December, after unusually high fund flows in November following the US presidential election. Dollar strength and continued bullishness on US equities kept gold in check in the first weeks of 2017, with investors waiting on the sidelines for opportunities.

In 2016, the gold price peaked at $1,366 an ounce in July but subsequently fell to end the year at $1,150. This week it is trading at around $1,200, after sinking around 10% to as low as $1,129 on December 21 from $1,261 on November 9 after Donald Trump's US presidential election victory .

Tobias Bland, chief executive of Hong Kong fund manager EIP, which last month launched its Xie Shares Gold Miners ETF, said China was the big driver of demand for the metal. “China has already bought $3 billion worth of physical gold in the last couple of months, just in retail," he noted. "For the Chinese investor, it’s an RMB hedge because you’re owning a dollar asset, and there are not many ways you can do that in China.”

William Chow, Value Partners’ Hong Kong-based managing director for ETF business, confirmed the trend: “We see increasing participation from local and mainland retail investors in the secondary market after the Christmas break, where the gold price is gradually gaining some upward momentum."

Net flows for physical gold ETFs in major Asian markets
Country ETF  2013 2014 2015 2016
China HuaAn Yifu Gold ETF -131 -21 87 856
China E Fund Gold ETF -55 -25 16 294
China Bosera Gold ETF N/A -1 89 -27
China Guotai Gold ETF -170 0 0 125
Hong Kong Value Gold ETF 2 5 -14 -14
India SBI-ETF Gold 0 0 0 121
Japan Japan Physical Gold ETF 52 35 73 66
Asia total   -294 269 235 1,369
Australia ETFS Metal Securities -81 -37 -37 10
Australia BetaShares Gold Bullion -30 -5 1 22

Source: World Gold Council, SSGA; Note: Figures are in $ million and only include physically backed gold ETFs

Central banks represent another major source of gold demand and one that looks set to grow in importance. The metal accounts for about 13% of central bank reserves globally, said Andrew Driscoll, CLSA’s Hong Kong-based head of resources research.

This figure had remained stable over several years ahead of the US election, but a year-end survey by the World Gold Council of 19 central banks showed that 17 of them planned to increase their gold reserve levels over the next three years.

Risks for gold

However, a move to positive interest rates represents a key risk for gold, as it would push up the cost of holding the metal. However, CLSA suggested that downside protection should be provided by a focus on the prospects for higher inflation.

Strength in the dollar is also considered a headwind for gold, given its inverse correlation, but this doesn’t always hold true, with periods where both the gold price and greenback trend together.

CLSA’s global equity strategist, Chris Wood, said the most potent trigger for a new bull phase for gold would be renewed easing by the Federal Reserve and the resulting realisation that the Fed would not be able to normalise monetary policy.

Wood believes that G7 central banks, particularly the Fed, will not be able to exit quantitative easing in a benign manner. He said that posed a threat to the stability and integrity of the current fiat-paper-money system.

“Gold will be the natural beneficiary of this process, since it is the only form of ‘money’ that is not part of the credit system," added Woods. "Gold stocks remain the best geared way of investing in this outcome.”

Fund flows in November 2016 and January to November 2016
Name Total assets, Nov 2016 Net flows, Nov 2016 Net flows, YTD 2016 Exchange
SPDR Gold Trust 33,465.9 -2,261.9 9,628.2 Hong Kong, Tokyo, Singapore
ETFS Physical Gold 5,583.6 -150.4 1,890.4 Japan Exchange Group
HuaAn Yifu Gold ETF 987.3 -65.6 867.4 Shanghai Stock Exchange
E Fund Gold 292.1 -2.7 30.9 Shenzhen Stock Exchange
Guotai Gold ETF 119.6 17.6 117.4 Shanghai Stock Exchange
Bosera Gold ETF 101.9 -36.4 9.6 Shenzhen Stock Exchange
Value Gold ETF 85.8 7.2 -6.7 Hong Kong Stock Exchange
HDFC Gold ETF 75.9 -0.5 -20.9 National Stock Exchange (India)
UTI Gold ETF 70.6 -4.2 -16.5 National Stock Exchange (India) 
Yuanta S&P Gold ER Futures 51.6 22.7 27.7 Taiwan Stock Exchange
BetaShares Gold Bullion ETF 43 5.7 31.2 Australian Stock Exchange
Samsung Kodex Gold Futures 41.6 6.3 -11.4 Korea Stock Exchange
ANZ ETFS Physical Gold ETF 8.9 2.5 9 Australian Stock Exchange

Source: ETFGI