ETF Edge - Gold back to gaining after a slide 8/18/25

Episode Date: August 18, 2025

Amid geopolitical and domestic uncertainty, gold is trending higher again after backtracking. History suggests there is yet more room to run. Plus, a covid-period-like warning sign to take note of.   Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQ. Let's rethink possibility. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things exchanged traded funds, you're in the right place. Every week we're bringing you compelling interviews, thoughtful market analysis, and breaking down what it all means for investors.

I'm Leslie Picker, in for Dominic Chu. Amid uncertainty, gold is gaining again. But individual investors seemingly have a different perspective. perspective on risk than institutions. Here's my conversation with Joe Cavatone, managing director at World Gold Council, along with Mike Atkins, bounding partner at ATF action.

Joe, your firm is behind the largest gold ETF. It's up substantially year-to-date, but you see more room to go higher based on some historical precedence. That's right. So we are definitely seeing unprecedented levels in terms of interest for the gold market, in particular gold-back exchange trade.

funds. What you talk about risk and uncertainty is really driving the investment sentiment. And while people are comfortably continuing to stay risk on, I think they're really starting to get a very significant appreciation for how you need to hedge that and gold fits that bill perfectly. So using exchange-traded funds backed by gold, you can actually add a hedge, an appropriate offset for when markets gap down or risk is unclear and you need that protection in their portfolio. Year to date, we've seen record flows in both exchange-traded funds in the U.S., but also in Asia. So the market's a global market and really growing quite substantially. Yeah, it's certainly got a lot of tailwinds in the hedging department. Mike, you're also looking

at gold ETFs as a percentage of SMP 500 market cap. How does it fit into the broader equity picture? Yeah, I think what's interesting about the gold ETF market as a total, like, to take out exchange-s traded funds and take out, and just look at the growth in the S&P 500 and the growth of the total gold market have been very similar over the last years. They both exploded over the last decade, 3x in total market capitalization.

And if you think about the ETF market, which we do more and more as a proxy of the allocation of investors, how they're investing their assets, looking at the ETF market, the percentage of gold ETFs has actually come down. significantly over the last decade relative to the percentage of when you're looking at the S&P market capitalization so basically what I'm saying is while the

flows in gold ETFs has been staggering in terms especially compared to the last several years we're on pace for a record year as Joe mentioned if you look at that as a percentage of the S&P 500 it's actually come down quite a bit from 0.6 you know 10 years ago to 0.3% today so where we draw that what we mean when we look at that we think well actually people are less hedged as a percentage of the equity market they were 10 years ago even though these flows are coming in so i think one thing we lose track of and looking at absolute terms is what does it mean as a percentage of the overall market capitalization and i think there's probably a lot of room for more allocation

into gold ETFs if you're thinking about it as a percentage allocation hedged to your overall portfolio What about the fact that there are a bunch of other different ways, even using ETFs to hedge one's portfolio? Does that take share away from gold being used for that purpose? I think it does. I mean, the ETF market continues to mature a lot, and you're seeing a lot of flows going into non-traditional strategies like buffers and other types of hedge strategies. But just purely from a gold ETF perspective, it's pretty small relative to how people have allocated their portfolios or more likely how professionals are allocating portfolios in terms of that total market capitalization. So yeah, we're seeing a lot of interest in these gold ETFs and a lot of

flows coming into them, but it's not keeping up with the pace of their total allocation within their portfolio. Yeah. Joe, we were talking before this just about how gold ETFs used to be primarily a U.S. phenomenon, that it was U.S. investors interested, and that has broadened internationally. what's behind the geographic diversification of interest into gold ETFs? There's quite a bit behind it. The first thing I'd say is, while I definitely share the opinion that Mike has in terms of the allocations to gold or lower, what I would say is that looking just at S&P and just at US ETFs is not necessarily the right way to see it. The European ETF market has grown and matured dramatically,

and that's probably about 35% of the overall ETF market for gold-backed ETFs worldwide. And what we've actually seen a significant amount of growth in the last two years has been the growth of exchange trade of funds in Asia. China, India, Japan, 2024 had record flows. Now, relatively small, but you're looking at a market that's growing quite substantially. Now, gold can be purchased through ETFs, but it can also be purchased in the physical sense. So it's a small component of what we are seeing in terms of portfolio allocations in the form of exchange traded funds. but don't lose sight of the fact that gold trades over the counter and physical gold ownership, which we're seeing in the investment landscape continuing to grow on a global basis.

Mike, which do you think is more likely to drive gold prices in the near future? We've got geopolitical risk, which is obviously front and center today. There's also kind of the more domestic element, whether it's the Fed decision or fiscal spending and inflation and so forth. Yeah, I mean, I think Joe makes a great point. about the gold market, just to put it in perspective in terms of what's going to drive the price. Let's use Bitcoin, because everybody likes to talk about Bitcoin. Right now, U.S. listed Bitcoin, spot Bitcoin ETFs make up about 6.5, 7% of the total market capitalization of Bitcoin.

Gold, it's less than a percent, right? So gold ETFs is relative to the gold market capitalization, call it $23 trillion, is a very small fraction. So what we've seen over the last several years is central banks continually allocating more and more to their gold allocations, their gold reserves, which I think is a much bigger piece of that storyline. And then that, of course, goes into the trend that we've seen since COVID, where more people, more central banks are diversifying away from the dollar into gold. And I think that's going to be a bigger driver of the price of gold than ETFs can possibly be just given. how small they are as a relative percentage of the market cap. Yeah, and kind of speaking of the geopolitical implications, as well as the domestic concerns,

there was some volatility in gold over the last week or so because of this idea that some parts of gold would be tariffed. But President Trump did state that gold will not be subject to tariffs, but the market seems to still be waiting for official confirmation from that. How does all the uncertainty impact? flows and prices amid some of that that whipsawing that we saw last week. So I think it's fair to say that from the outset of the administration, gold hasn't been singled out, nor really the subject of what the president has made clear,

whether it's critical minerals or minerals used in defense or telecommunications. Those items, those were the real subject of what he's concerned about with tariffs. So the market's always been expecting gold in the investment context, in the wholesale context, not to be tariffed. Now what happened was a moment where one of the refiners out of Switzerland asked for certain clarity because of the very complicated codes that are used by customers. And they got that and the president quickly responded by simply saying we're going to clean this up so that the message he's put in the social media has calmed the market and when it comes to the real underlying market itself

there wasn't much very much that was really going wrong with the market. What we really saw were futures where the gold needed to physically back those Comex products. Trade at a premium to the spot price that we basically all look at all day long, the ounce price. And that's what should happen if there's uncertainty or question. It happened during COVID. It happened at the beginning when no one knew exactly how terrorists were going to impact us. But at the end of the day, what we've got is markets back to normal conditions. Everyone's waiting for that formal clarification, which I'm sure we're going to get. But the president has a lot on his agenda today. I think that we'll sit tight. And when we saw the clarity come around

copper, it was several weeks after the announcement on copper, so maybe it'll take us a week or two. But right now, the market's calm, and it's continuing to perform like we've expected it to. It's liquid, it's open, and people are able to get access without any impact from the question around tariffs. So no complaints from you at the moment. I do have a question for both of you, the ATF industry, always innovating. What new gold-centric or gold derivative products are on the horizon that you believe are interesting. Mike, we'll start with you. I mean, I don't think you really can change the dynamic of gold.

It's a great spot vehicle, allocation vehicle, in terms of, if you're just looking at the gold market, it's hard to beat a GLD or any of the other ETSs in terms of tracking the spot price. It's a great allocation vehicle, exactly what ETS were designed to be. We've seen some strategies come out that are, you know, writing covered calls on the ETFs of the gold themselves to create an income stream from gold or buffer ETFs to take away the volatility. But in terms of pure product proliferation, I think it's really difficult to look at the GLD structure

and find a better way to think of allocating to this as an investment other than just the pure vehicles that are out there currently. Joe, what do you think? I tend to agree. regulated instruments around the globe offered in markets that you wouldn't even imagine have access to exchange traded funds. So they are acceptable, very efficient, and very well-welcome instruments in the market. What I think is interesting to keep a close watch on is how digitization will start to develop. We've been working closely with a number of industry bodies including the LBMA and others and the bullion banks to talk about tracking and tracing gold.

From there, we're going to build out a better way to see what the world will look like, and how it will develop if we can find a digital access to the gold market to sit next to the exchange traded funds in the future. Like a stable gold instead of a stable coin. Well, actually, gold is in its own right, a stable coin in the form of an exchange traded fund, but how do you rightfully digitize it and make it easier to access or more use cases, for example, using gold more readily and collateral or other mechanisms for institutions? Maybe easier for anti-money laundering and...

Precisely. So right now we feel very confident about accessing the gold market with exchange traded funds and we're trying to find the right way to possibly unpack digitization. Hmm. Let's back up a little bit and talk about ETF and overall ownership trends. Mike, you're seeing a stronger bifurcation between institutional and individual investors. And that actually is concerning to you. Why?

Well, I think product proliferation in the ETF market is at its all time high right now. And if you look at the ETF market and break down ownership of the ETF market, it gives you a sense of how these products are being used. So as a just baseline, about 64% of the entire ETF market can be traced back to 13F filings, which gives you a sense of the institutional ownership of ETFs. If you look at this and then start going downstream a little bit into leverage and inverse or single stock ETFs, these have seen incredible amounts of assets come into them. You know, single stock ETFs have over.

almost $40 billion in ETFs and you know sub 10% institutional ownership and the institutional ownership does exist is purely there to provide the trading and the liquidity for the retail ownership so I think if you just go through the ETF market and look at ownership percentages by different categories and a great example is you know not to pick on ARC as a example of this but during the COVID years when markets went really through the roof in terms of flows into very niche thematic themes, those types of ETFs have very low institutional ownership,

so it's driven by the retail investor. We are seeing signs of all of those types of niche strategies, especially in the thematic and innovative space, starting to approach 2020, 2020, 2021 types of lows again, you know, right at the top of the market. And that, I think, is a concerning concept and a great way to dissect it is to look at, Hey, is this product being professionally allocated at the whole, or is it being allocated mostly by retail?

I think we're seeing in a lot of these more niche, newer areas of the ETF market, it's being driven by retail. Yeah, and your point about kind of the analogies between 2020-2020-21 timeframe and today ring true in that area too. Let's stick a little deeper into those thematic and single-stock pockets that individuals are growing. into specifically which areas of the market are those in where where is retail kind of finding its footing well single stocks is 40 billion dollars now and it can be broken up between leverage products and covered call or synthetic income really it's synthetic calls on single stocks you know so for an example MSTY trace you know it's a they're generating yield off of a micro strategy right

These strategies are incredibly volatile. They're 99% owned by retail. There's no institutions allocating these strategies, but there's billions of dollars coming into them. And, you know, the old saying, everybody's a genius in a bull market. These things have held up in terms of the, you know, not having a nav erosion because their underlying have done so well.

But if you have a yield-covered strategy that's paying out 100% income on an annual basis and the underlying doesn't keep going up, it's a train wreck. And it's, you know, it's waiting to happen. And I worry about that area of the market. Now, I think you can separate that from thematics. I actually believe that thematics are great portfolio allocation tools, whether it's good old-fashioned infrastructure, natural resources, or thematic growth like ARC does.

But when you start seeing the flows into those products take off, generally, that to me is a contrarian signal that we're overheating across the market and that's been shown time and time again in terms of money flows chasing returns yeah and kind of what it means when all of that flushes out and and a lot more people are affected by that uh joe what are you seeing in terms of individual interest in gold ETFs either as a hedge or speculation what what is kind of the flows behind the scenes tell you about the overall market so traditionally we've seen the institutional and the retail, the aggregator of retail flows, being about a 50-50 split, we still see that to be kind of the overall holding of how the ETF landscape looks.

But we're getting a lot more questions from institutions, and people are actually moving away from hedging or speculation, and they're really looking at strategically allocating the gold. The number that's talked about quite a bit is 3 to 5 percent, looking at portfolios and understanding while risk remains top of mind allocating the risk assets. We're seeing most people looking at gold and saying, I need to find a cost-effective hedge against drawdown moments, against moments when I know I need certainty and my liquidity. And with people's appetite taking on higher risk to chase return, they're understanding that gold fits in that portfolio. Now, to date, we've seen about $40 billion flow into the exchange-rated funds on a worldwide basis, another four.

That's through the first half of the year, and another four for July and August. We expect that trend to continue. And I think that what we're starting to see right now is that tipping point. It'll probably need the catalyst of a rate cut from the Fed so that people will start moving more aggressively into the gold allocations. But that's what we're sensing now. And institutions are calling us on a regular basis saying, look, we need to talk about how gold fits in and how we can use it for hedging.

Yeah. If I guess cash gets, you know, more expensive from a cost of capital standpoint relative to gold, then that could shift some of the money market fund capital into into the, that as a diversification play. And one last point that Mike raised, which is central banks, for the last three years we've seen record or near record flows with central bank activity. Now, we're on track to see something maybe a little slower this year, but it's still very significant.

So between investment and central bank flows, those are two driving use cases that will continue to make gold perform exceptional. How does InvestcoQQQQ rethink possibility? By rethinking access to innovation and the NASDAQ 100, let's rethink POSCO. Possibility, Invesco Distributors, Inc.