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European Gold ETF lead outflows in September - WGC

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(Kitco News) - For most of the year, gold's lackluster performance has been driven by outflows in North American-based gold-backed exchange-traded funds; however, the latest data from the World Gold Council (WGC) shows growing weakness in European-based assets.

In a report published Thursday, the WGC said that the global gold-backed ETFs saw outflows of 15.2 tonnes last month. Total holdings now stand at 3,592 tonnes, its lowest level since April.

The outflows in ETFs helped push gold prices down 4% last month. The market continues to struggle to find consistent bullish momentum as prices hold support above $1,750 an ounce. December gold futures last traded at $1,758.80 an ounce, down 0.17% on the day.

The report said that European-based funds led the outflows with 11.5 tonnes of gold liquidated. North American markets saw outflows of 6.6 tonnes. The analysts noted that shifting monetary policies is prompting investors to flee the gold market.

"Outflows from both regions stemmed from central banks announcing policy tightening going forward – the European Central Bank from its pandemic emergency purchase programme only, while the US Federal Reserve signaled asset tapering in Q4 with higher expectations of interest rate increases next year as well," the analysts said in the report.

The WGC noted that opportunity costs in the gold market have been pushed higher as real bond yields start to rise in anticipation of tighter monetary policies.

"Due to major economic policy changes announced by the European Central Bank and US Federal Reserve, yields increased to their highest level in Q3. In turn, the dollar strengthened, as real yields primarily increased in conjunction with nominal yields, given current US inflation expectations. Due to these factors, European and North American funds ultimately drove global gold ETF outflows over the past month," said Adam Perlaky, managing director and head of ETF Research at the WGC.

The WGC said that the one region that saw inflows last month was Asia. Asian-based ETFs reported inflows of 2.4 tonnes. Analysts said that the precious metal benefited from growing uncertainty as the Evergrande liquidity crisis rocked equity markets.

The WGC also noted that India-based ETFs saw their holdings rise to the highest level since 2013.

Perlaky also noted that low-cost ETFs continue to attract investors. The sector now represents about 6% of the global market.

Despite rising bond yields, Perlaky said that gold still plays an important role in a portfolio, especially as market volatility increases.

"Some central banks'hawkish approach, brought on by concerns that inflation may be less transitory than expected, may create headwinds for gold. Yet the need for portfolio protection and diversification remains constant, especially as investors seek to navigate potential stagflation," he said. If the economic recovery slows while inflation remains elevated, gold's portfolio value will come into focus, as defensive assets are historically the best performers in a stagflationary environment."

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