Against a backdrop of cyclical market volatility, investors are seeking exposure to gold – an asset often viewed as a defensive hedge. Investors in Short & Leverahed (S&L) gold ETPs have been gradually increasing their bullishness since mid-early 2017, with 2019 seeing record levels of bullishness on gold.
That’s according to new report from WisdomTree into Short & Leveraged ETPs which also reveals that the average investor leverage on gold ETPs reached an all-time-high level of 1.97x in January 2019.
As the US market rallied in January (S&P up 7 per cent) S&L investors appeared to take profits, selling USD4.3 billion of leveraged (long).
ETPs meanwhile, saw the second biggest single monthly outflow since the financial crisis. Accounting for leverage factors of the products sold, this amounts to unwinding equity positions by USD10.4 billion. These flows may reflect a view that January’s equity rally will not continue. Indeed, investors not only unwound long leveraged positions but also increased their short positions in equities by USD2.4 billion in January (a 20 per cent rise in short positions). Accounting for the leverage factors of the short products bought, this amounts to buying USD5.8 billion of short positions in equities.
Investors in S&L fixed income ETPs continue to unwind short US fixed income positions, with US fixed income short positions falling to a 10-year low and German Bunds and Italian BTPs short positions falling to two-year lows.
As the Federal Reserve (Fed) opted for patience in rate hikes, S&L ETP investors continued to reduce their positions in short US fixed income. S&L investors redeemed USD130 million from short US government debt ETPs in January (6 per cent of overall AUM). We believe this reflects investors’ increasingly bearish views on the inflation rate and the pace of interest rate hikes going forward across US and Europe.