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‘There’s plenty of room for bulls to be happy’: ETF expert on gold

Yahoo Finance's Akiko Fujita and Director of Research for ETF Trends, Dave Nadig, discuss inflows into gold ETFs amid volatility.

Video Transcript

AKIKO FUJITA: It is now time for our "ETF Report," brought to you by Invesco. And today we are focused on gold yet again. We're seeing a pullback in the session, down about 7/10 of a percent. The precious metals seen a 7% pullback since reaching those all-time highs earlier this month, though it is still up about 20% on the year. Let's bring in Dave Nadig. He's the Director of Research for ETF Trends. Dave, we've been talking so much about the momentum in August from the precious metals. Certainly seen as a hedge against the dollar as well. How much have you be seen that momentum slow over the last few weeks?

DAVE NADIG: Well, we've definitely seen it slow, but I think it's worth pointing out, this is after an incredible run, not just in performance, but just in terms of how dominant ETF investors have been in the gold market. Just a couple of quick statistics there. Barring coin demand, which is traditionally where a lot of folks have made their gold investments, you know, buy some coins, put 'em in a safe in the basement, it's at 11-year lows. Jewelry demand is down 50% since this time last year. And central bank buying, you know, to put in the bank vault as a sort of reserve currency, if you will, is down 40% versus last year.

What we have seen however, is 734 tons show up into the vaults that are tied to ETFs. And that's by far, beating our best one-year record of 2009. So the demand has almost been entirely ETF investors. So what that means, is likely we're going to continue to see volatility in the price of gold, because this is very easy money to go in and out. Investors can get in and get out of their gold position 100 times a day if they want to. Not recommended.

AKIKO FUJITA: I mean, it certainly seems like there is some more room to run. We had UBS coming out today raising the gold price forecast for 2021 to '22 by 15%. I mean, how much more room do you think it has to run if it is all driven by ETF demand here? Are we likely to see it push even higher, especially in the face of volatility in the equity markets?

DAVE NADIG: Well, one of the great things about gold, is that it is a purely psychological commodity. There's a limited amount of it, and it's worth exactly how much two people decide it's worth. It doesn't generate revenue. It's not a big industrial component. So it's a psychological commodity. And if you think about the things that drive it higher, it's gold's historic use as a safety play, as an inflation play. Both of those still seem quite relevant. A lot of people are concerned that the market overall is frothy. Plenty of people talking about inflation from all the stimulus we've had. So that seems to be intact.

On the flip side, a traditional source of demand, which has been strongly from China and India, if we see any good signs of a recovery there, that will be new demand coming into this market as well. So there's still reason for gold bulls to hope here. And on the supply side, while we've had mining down about 15%, that's been slowly coming back on.

But not a lot of people going to dig a lot more gold out of the ground. So I think there's still plenty of room for bulls to be happy here. I think it would take some sort of shift in the raw investor psychology to think that it was no longer necessary to worry about inflation and safety for gold to really sort of run back down towards say, its lows last year.

AKIKO FUJITA: You talk about the investor psychology, and certainly where the sentiment is, given some of the volatility we've seen. We have an article from "The Wall Street Journal" today coming out, saying asset managers have closed more ETF products than they have launched this year. What have you seen specifically?

DAVE NADIG: Yeah, that is a legit stat. The open, close ratio is something we look at. There are a couple of things going on here. A lot of those products that closed really needed to be closed. They were either very lowly traded ETNs with leverage and inverse components, or they were products that got in trouble during the volatility we saw. Again, some of these leveraged and inverse exchange traded notes and exchange traded funds. Those funds needed to close. That was a good thing.

On the flip side, we've seen what I would call more measured launches. Most of the launches we've seen this year have actually been quite successful. Things like Roundhill's BETZ, the sports betting ETF, or Direxion's Work From Home ETF, WFH. Both of those had strong sort of $100 million out of the gate launches in the midst of all this market turmoil.

And we're sitting here on really record flows, about $270 billion into ETFs so far this year. At this point last year, we were at about $140. So things are very strong still in the ETF market. We've just got a lot of ETFs, and I think we can expect the pace of growth of number of funds to continue to slow for the future.

AKIKO FUJITA: So Dave, one investment takeaway for those who are watching, you heard Joe Duran earlier from Goldman Sachs saying it's important to think about the breadth of the market, having that diversification. Where do you think those investors who are looking to put their money in the ETF space, what should they be looking at right now?

DAVE NADIG: Well, if you look at where investors have been putting their money, they've really been across the board. So it's been broad US diversified equities. That's one of the great things about ETFs, is you make a single trade and you're not just getting Tesla, you're getting 500 or even 3,000 stocks in that mix.

So we continue to see flows in those big, cheap, broad products. That's a good thing for investors. But we've also seen a lot of money flow into what I would call, more defensive plays. Whether that's gold or a lot of the funds that we've been talking about over the last year that have defensive characteristics, from dividends to buffers for the downside. So all of those remain great options for investors.

AKIKO FUJITA: OK, Dave Nadig from ETF Trends, always some good advice there. Thanks so much for joining us.