Gold exchange-traded funds (ETFs) experienced outflows of 173 t, or $9.1-billion, in 2021, driven by North American funds whose assets fluctuated in tandem with the gold price.
Collective gold holdings were down 5% year-on-year to 3 570 t for the year, while assets under management in value terms dropped by 9% year-on-year to $209-billion, as net outflows were compounded by a 4% contraction in the gold price.
Despite the considerable outflows in 2021, gold ETF holdings remain above pre-pandemic levels, as a result of the record inflows of 875 t, or $48-billion, during 2020.
Asian gold ETFs emerged as the primary growth driver among global funds, adding about 20%, or $1.5-billion worth of gold, over the year, while gold ETFs in Europe turned positive in the second half of 2021, amid rising inflation expectations.
The World Gold Council explains that Chinese-based funds, which make up more than 60% of total inflows for the region, are being driven by concerns over slowing economic growth and lower yield expectations, as well as local investors taking advantage of a lower gold price.
Gold finished the year at $1 806/oz, which indicates a slight price rally on the back of the rapidly spreading Omicron variant of Covid-19, prompting flight-to-quality flows, but it was not enough to offset outflows from earlier in the year.
Overall, gold faced headwinds from higher bond yields, especially during the first quarter, and a stronger dollar, particularly in the second half of the year.
Conversely, gold was supported by concerns that inflation surprises would not be transitory and market volatility linked to continued Covid-19 variants.
Looking ahead, the council believes gold will experience similar dynamics in 2022.
The persistence of high inflation is still likely owing to knock-on effects from Covid-induced monetary and fiscal policies, supply-chain disruptions and a tight labour market.
This, combined with high equity market valuations, potential new Covid-19 variants and a growing appetite for less liquid assets, could well result in more frequent market pullbacks and increased demand for gold as a portfolio hedge.
Gold may also find continued support from consumer demand and central bank purchases, both of which continue to be important long-term drivers of performance.
On the contrary, gold may also face challenges if interest rates rise quicker than currently anticipated.
“In our view, however, despite potential rate hikes both nominal and real interest rates will remain low from a historical perspective.
This, in turn, will continue to drive structural changes in the composition of investment portfolios and likely increase the need for a high-quality liquid asset such as gold,” the council states.