Who is buying gold ETFs?

Compared to the beginning of the year, the scale of China's gold ETFs has grown by over 70%. Some public funds that laid out their positions in gold commodity funds early on have reaped the benefits of this wave, but the feast is far from over.

Amidst the "central bank gold buying talk" and the thunderous artillery fire in the Middle East, the desire of Chinese investors to buy gold has been continuously stimulated.

Research by Dongwu Securities on the recent global main gold ETF capital flows found that while large gold ETFs in Europe and America are withdrawing, gold ETFs from Mainland China and Japan have become the vanguard of inflows.

Wind (Wangdian) data statistics show that compared to the beginning of the year, the scale of China's gold ETFs has increased by 67%. In addition, several gold funds have seen significant premiums, with the speculative drama from limit-up to limit-down being played out again.

Some public funds that laid out their positions in gold commodity funds early on have reaped the benefits of this wave, but the feast is far from over. Although gold prices continue to break historical highs, various companies are still racing against time, heading to the next city—gold stocks with greater elasticity.

Some institutions have set their sights on the excellent ecological niche of gold stock ETFs.

"The actual risk of gold commodity ETFs is similar to that of bank accumulated gold and paper gold, but they are classified as R5 in the risk level, leading to many institutions such as insurance, FOF, and investment advisors being restricted in their allocation, which is essentially a misalignment of risk levels. However, gold stock ETFs, although ostensibly classified as R4 or even R3, are leveraged varieties on gold prices and can obtain more excess returns during the rising period," a fund industry observer told Caijing.

In the view of most institutions, although the current period has entered a phase of emotional game-playing, and short-term attention should be paid to pullbacks, the long-term outlook remains bullish, with some institutions even proclaiming that gold is standing at the starting point of a long-term bull market.

"If before this year, I had asked you to store the physical gold you bought at a cost of 50% or even higher in a bank's vault, you would definitely think I'm crazy," said Hong Hao, Chief Economist of Si Rui Group, at the recent Morningstar (China) 2024 Annual Investment Summit. Gold is highly correlated with changes in U.S. labor productivity. "U.S. labor productivity has entered a new cycle of rising from the bottom, and it's not hard to imagine that the gold trend should be far from over."From the consensus of preempting the logic of European and American easing to the shift to geopolitical situations in late March, and then to the continuation of sentiment games based on the heat of commodity markets, Wang Xiang, fund manager of Bosera Fund, believes that although the amplitude and volatility are gradually increasing, the momentum stability is getting closer to the short-term reversal window. "Short-term market prices have been dominated by game sentiment, deviating from the fundamentals, and the probability of adjustment is rapidly increasing. However, for investors who have not been able to get on board during this rapid rise, it will bring a rare opportunity to intervene again."

"The new high of gold this round is mainly driven by the capital side, which fully reflects the recent market's optimistic expectations for the fundamentals. The long position transactions are gradually becoming crowded, and it is necessary to pay attention to the risk of pullback in the short term. Looking forward to the whole year, we are optimistic about the long-term value of gold as a central bank's 'de-dollarization' allocation." Huaan Fund stated.

"Gold is very worth asset allocation. Because gold has two functions that other assets cannot replace. It is an absolute tool against wind and waves, and it is also an absolute risk-avoiding tool." Zhang Yun, General Manager of Index and Quantitative Investment Department of Yongying Fund, told Caijing.

Hot speculation on gold ETFs

"Gold can quickly break through $2300/ounce in a short time, we are more inclined to think it is an interesting coincidence. Macro narratives are always slow variables and cannot explain why the gold price has successively broken through the two important levels of $2200/ounce and $2300/ounce in just two weeks." Dongwu Securities, after combing the recent global main gold ETF fund inflow situation, found that the trends of gold investment in various regions have appeared obvious differences.

The funds with higher inflows are the SPDR Minishares Gold Trust in the United States and several gold ETFs from Mainland China and Japan, while the ones at the bottom are the large gold ETFs in Europe and America. Based on this, Dongwu Securities believes that the recent rise in gold is driven by capital, with a stronger "retail investor" attribute, and the Asian region is eye-catching.

From the data, the inflow of funds into domestic main gold ETFs has significantly increased. Wind data on April 17 shows that the largest Huaan Gold ETF has exceeded 20 billion yuan, reaching 21.7 billion yuan. The scale of all gold-related theme funds in the whole market has reached 51.4 billion yuan, a 77% increase compared to 29.1 billion yuan at the end of last year.

At the same time, some gold funds have appeared inexplicable premium market conditions, and speculative funds have frequently appeared. Relevant fund companies have also noticed the premium risk and have issued prompt announcements many times, but the effect seems not obvious.

Currently, the biggest premium risk is Yifangda Gold Theme A RMB (161116), with a premium rate as high as 35% at the close on April 17. The fund, a QDII-LOF fund established in 2011, has suspended subscriptions, and the latest scale is 129 million yuan (data as of December 31, 2023). On April 16, the net value of the fund was 0.945 yuan, while the market price had reached 1.273 yuan, with a daily transaction volume of less than 30 million yuan.

Since the beginning of April, Yifangda Fund has frequently issued premium risk announcements. In the announcement on April 18, Yifangda decided to temporarily suspend trading again.Yi Fangda Fund stated in its announcement, "We hereby remind investors to pay attention to the premium risk in the secondary market trading prices. If investors buy at a high premium, they may face significant losses."

Some newly established funds have also been subject to speculative trading by capital. The premium rate of the China Securities Shanghai-Hong Kong-Shenzhen Gold Industry Stock ETF by Huaxia exceeded 30% at its peak. The fund hit the daily limit up for three consecutive trading days before the Qingming holiday, and after the holiday resumed trading, it hit the daily limit down for two consecutive trading days.

Each fund that has been speculatively traded has many commonalities: low transaction volume in the market, easy to speculate; restricted subscription outside the market, external incremental funds cannot participate in the investment through subscription, and can only buy through the secondary market; coupled with the climax of market sentiment and the existence of cross-market trading arbitrage space, absurd scenes appear from time to time. The rise in the Japanese market previously led to continuous speculation of related ETFs, and recently speculative funds have come to the gold theme.

The aforementioned Yi Fangda Gold Fund is a restricted QDII, which has long suspended subscriptions due to the limitation of foreign exchange quotas. The Shanghai-Hong Kong-Shenzhen Gold Stock ETF by Huaxia also encountered a special market due to a special time node and a special product.

"This is quite coincidental. The Huaxia Shanghai-Hong Kong-Shenzhen Gold Stock ETF is a cross-market ETF, which coincided with the Easter holiday in the Hong Kong stock market and the Qingming Festival in the A-share market. At that time, subscriptions were restricted, and market makers could not subscribe to new shares to sell to them, leading to the market price being pushed higher and higher, hitting the daily limit up and then being hit by arbitrage funds to the daily limit down," an industry insider analyzed.

After noticing the abnormal trend of the Huaxia Gold Stock ETF, the exchange also issued a reminder, focusing on monitoring the fund and strictly regulating investors who frequently and massively participate in the trading of the fund and have abnormal trading behaviors.

"If the ETF scale is relatively small and liquidity is poor, the fund manager needs to try to make the ETF's trading price accurately reflect the net value changes. It is especially important to pay attention to not causing significant price distortions through artificial restrictions on subscriptions or redemptions, which would mislead many retail investors," an index fund manager commented.

From gold spot to gold stocks, according to the "Finance and Economics" magazine's statistics on the existing gold-themed investment funds in the market, there are currently 20 gold-themed products.

The earliest gold fund appeared in 2011, with Yi Fangda and Huitianfu each having a QDII fund invested in the international market. Both funds operate in a FOF manner, with Yi Fangda's gold theme focusing on gold assets and gold stocks. Huitianfu not only invests in gold but also in precious metals such as silver, platinum, and palladium.Starting from 2013, ETFs investing in domestic gold spot began to emerge, with major fund companies such as Guotai, Huaan, Yifangda, and Bosera joining the fray. In 2016, the "Shanghai Gold" contract was born, giving the Chinese their own benchmark for gold pricing. By 2020, the first batch of Shanghai Gold ETFs was established. Currently, fund companies including Southern, Jianxin, Fuguo, Harvest, BOC, Tianhong, and GF have all made strategic deployments.

The Shanghai Gold contract starts with a relatively high trading unit, but it determines the price through the method of "inquiring quantity by price, and matching quantity," which has the characteristics of fairness, transparency, and resistance to manipulation, making it easy for investors to observe and trade. So far this year, the increase in gold commodity funds is about 18% (as of April 17th).

Whether it is QDII linked to London Gold or gold commodity ETFs tracking Shanghai Gold, they are essentially unleveraged products. In 2023, a new type of "gold price amplifier" emerged—ETFs tracking gold stocks.

The first to try this was the Yongying China Securities Shanghai-Hong Kong-Shenzhen Gold Industry Stock ETF. The fund manager, Zhang Yun, had participated in the design and issuance of the earliest batch of gold funds and, along with the growth of the domestic gold ETF market, he is very optimistic about the long-term trend of gold.

After joining Yongying Fund, he conceived the idea of issuing a gold stock ETF. "There are already more than ten gold ETFs in the country, but in fact, gold stocks are more likely to achieve excess returns, which is a significant gap."

Zhang Yun analyzed that the elasticity of gold stocks comes from three aspects: first, the asset side with the nature of options, which amplifies the profits of mining companies when the price of gold rises; second, the expansion of production capacity brought about by the rise in gold prices; and third, the discovery of new resource reserves.

To meet the condition of "more than 30 index constituent stocks with a market value exceeding 700 billion," he included Hong Kong stocks and customized a new index, becoming the first approved and first issued gold stock ETF.

How much higher are the returns of gold stocks compared to gold? According to Zhang Yun's statistics, over the past five years, the beta of gold stocks compared to gold prices is about 1.2 times, and about 1.3 times during the upward range of gold prices. The CSI China Gold Industry Total Return Index has outperformed domestic gold prices (AU9999) by more than 17 points over the past five years.

Currently, the net asset value of the Yongying China Securities Shanghai-Hong Kong-Shenzhen Gold Industry Stock ETF is 815 million yuan, with a rise of 28% so far this year. The Huaxia China Securities Shanghai-Hong Kong-Shenzhen Gold Industry Stock ETF, established in January this year, has seen its net value rise by 36%, and the secondary market price has increased by 45%.

In addition, there is also an actively managed fund in the market that invests in gold stock themes, which is the Qianhai Kaiyuan Gold and Jewelry Fund. The increase so far this year has exceeded 20%.From a short-term market price perspective, the gold market has been dominated by speculative sentiment, deviating from the guidance of fundamentals, and the probability of adjustment is rapidly increasing. In the newly issued fund market, a new batch of gold-themed funds is still lining up to join the feast.

In addition to multiple ETFs and linked funds tracking the China Securities Shanghai-Hong Kong-Shenzhen Gold Industry Stock Index, there are also QDII funds invested in international gold producers. It can be seen that the battlefield of fund companies has shifted from gold commodities to those companies in the gold industry chain.

Some public fund insiders believe that gold commodity ETFs belong to the category of commodity futures with a risk level of R5, which cannot be allocated by insurance funds. However, the level of gold stock ETFs is between R3 and R4, which can meet the allocation requirements of insurance funds. Moreover, there are also many restrictions on the allocation of commodity futures by FOFs and investment advisors.

"Some institutions have shown a strong interest in the product, with some customers buying up to the maximum standard of allocation in one go," the aforementioned public fund insider revealed.

Data from the China Insurance Asset Management Association shows that by the end of 2022, the total scale of funds managed by 32 insurance asset management companies was 24.52 trillion yuan. Among them, the scale of stock allocation was 1.53 trillion yuan, accounting for 6.84%; the scale of public fund allocation was 1.01 trillion yuan, accounting for 4.50%.

The huge amount of insurance funds has become a new handle for public funds to layout the gold stock ETF track. However, some interviewed insurance funds also told "Finance and Economics" that the current gold is a short-term hot spot and not suitable for large-scale chasing high. "The nature of our funds determines that the money that is really taken out may be less than 1%."