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Negative-yielding debt sends investors scurrying into gold
By: Financial Times | January 29, 2020

• Analysts say ultra-low returns mean yellow metal has become a necessity in portfolios

Investors around the world are hurrying back to bullion.

Holdings in gold-backed exchange traded funds have risen to their highest levels in seven years, following $19.2bn in inflows last year. Analysts say interest has picked up for a variety of reasons, including fears over slowdowns in big economies, rising geopolitical risks and an apparent loss of faith in traditional “haven” assets such as Japan’s yen.

But chief among them is a giant mound of negative-yielding debt, now tipping the scales at more than $13tn. If buyers of bonds are being asked to pay for the privilege of holding them to maturity, then the appeal of gold — which yields nothing but also costs nothing to hold on to — is burnished.

“You’re seeing flows into the metal, it’s a global trend,” said John Hathaway, co-manager of the Sprott Gold Equities fund. “The typical havens of safety are not that safe any more and gold is getting a bid for that reason.”

The revival for the yellow metal comes after a fairly bleak few years, in which a steady global economic recovery pushed gold prices down as low as $1,000 a troy ounce in December 2015.

This year, however, gold prices have climbed to their highest levels since early 2013, at more than $1,600 a troy ounce. Global holdings in gold-backed ETFs have more than doubled since 2015 to a total of $141bn, according to the World Gold Council, helping to make the SPDR Gold Trust the 10th largest ETF in America.



The surge in ETF buying has boosted exports of gold from Australia to the UK, where gold backing the SPDR Gold Trust is stored in vaults. Australian gold exports to the UK rose by 1,384 per cent in the quarter ending September 2019 to $5.3bn, because of demand for bullion, according to the government in Canberra.

Gold’s rapid climb since the middle of last year has coincided with a fall in US real yields (adjusted for inflation). Five-year Treasury real yields were at minus 0.05 per cent this week, down from almost 1 per cent at the same point in 2019.

Negative bond yields “have fundamentally changed the appeal of government bonds versus gold as safe havens,” said Xiao Fu, head of global commodities strategy at Bank of China in London. “This has profound implications for long-term portfolio construction as gold becomes a necessity rather than an optimal allocation,” she added.

Central banks have been the keenest buyers of gold, purchasing 5,019 tonnes of gold worth more than $200bn since 2009, according to the World Gold Council. Official gold reserves are now just 10 per cent below their all-time high of 38,491 tonnes in 1966, it said.

Central banks last year bought 650 tonnes of gold, according to the industry body, the second highest level of annual purchases for 50 years. Purchases have continued this year with Russia and Kazakhstan adding 9.7 tonnes and 3.5 tonnes, respectively, to their reserves, according to the WGC.



Mr Hathaway said reserves managers are shying away from US debt because they are concerned about “ultra-low” interest rates and the “banana-republic levels” of borrowing.

“These so-called safe havens really don’t offer any yield protection so they’re in the same position as gold which doesn’t have yield protection either. But it’s liquid and you don’t have counterparty risk,” he said.

Russia has also been keen to “de-dollarise” its reserves because of concerns about the threat of US sanctions, said Alistair Hewitt, head of market intelligence at the WGC.

The demand for gold-backed ETFs has overwhelmed interest in shares of actual gold miners, which have languished. The VanEck Vectors Gold Miners ETF, which has a mere $13bn under management, has slipped by 3 per cent this year. Analysts at BMO Capital Markets* said they expect assets in gold-backed ETFs to exceed the market cap of all gold producers over the next decade.

Everett Millman of Gainesville Coins, a precious metals dealer in Tampa, Florida, said many newcomers to gold are simply looking to hedge their exposure to the stock market. Some fear that a crash from dizzy heights is just around the corner, even though the US Federal Reserve remains supportive, planning to leave interest rates where they are for the rest of this year.

In that respect, he said, this new generation of “goldbugs” is much the same as the last, which rode a three-year rally in gold after the 2008 financial crisis.

“People are seeing more reason to seek safe haven assets,” said Mr Millman. “It’s one of those ironic situations where what’s good for the equity markets is also good for precious metals.”

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