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Time to stop being gloomy about gold ETCs?

Sentiment is improving towards gold exchange-traded commodities (ETCs) and there are good reasons why you should be holding them now
November 4, 2015

Gold has taken a beating over the past two years and the potential of an interest rate rise could spell more pain. So why has investor money started flowing back into gold exchange-traded commodities (ETCs) this month? And why has investment firm Tilney Bestinvest decided to add a gold ETC to its multi-asset portfolios for the first time? The time may have come to get less gloomy about gold.

After reaching a top in August 2011, the price of gold started falling and has barely stopped since. Investors turn to gold during times of crisis, but a two-year equity bull market has sent money pouring into higher-risk assets and a strong dollar has also chipped away at gold's safe haven status.

The US Federal Reserve meeting on 28 October 2015 sent the price of gold tumbling even further last week. The metal fell by $30 in minutes in the wake of a more hawkish Fed statement and at one point touched its lowest level in two weeks.

But some investors had already started pouring money back into gold ETCs. In the week up to 29 October, ETF Securities recorded $31.5m of inflows into gold, marking the seventh week of consecutive inflows to gold ETCs - a major shift from the stream of outflows earlier in the year. Nitesh Shah, research analyst at ETF Securities, says: "In the year to date, we are several billion dollars down in terms of flows into gold. Since the beginning of the year markets have been more characterised by outflows rather than inflows, but recently we've seen fairly strong inflows and in the past month $140m has flowed in."

That sentiment was echoed by Tilney Bestinvest's announcement last week that it was adding ETFS Physical Gold GBP ETC (PHGP) to the platform's multi-asset portfolio range. The firm said it thought the gold ETC would protect against the risks it thinks are being posed by quantitative easing (QE) programmes and a lack of strong US data.

Ben Seager Scott, director of investment strategy at Tilney Bestinvest, said that the company was using gold as a way of de-risking and diversifying the portfolios away from assets that have become increasingly correlated as a result of global QE. He said: "In an environment where central bank activity has created a few paradoxes and a high correlation among a lot of other asset classes, gold is a diversifier. If markets lose credibility in central banks, gold's characteristics as a store of value will come in useful too."

Tilney has invested 2 per cent of assets across its multi-asset portfolios in PHGP.

But not everyone is feeling as positive. Shaun Port, chief executive officer at Nutmeg, says: "We removed all gold holdings from Nutmeg customer portfolios in early 2013 (when the price was around $1,650 per oz) on the basis that the yellow metal was no longer trading as a 'safe-haven' asset and that it was widely over-owned by retail investors. During the Greek crisis gold failed to see a marked uptick. Over the summer, the sharp correction in equity markets - based on fears that the world's second-largest economy is going into recession - failed to give gold a significant lift."

"Overall, we still expect selling of gold holdings - primarily through ETCs - to continue."

Alan Miller, founder of SCM Direct, says: "We have never held gold in our portfolios and never got sucked into the frenzied obsession that took place only a few years ago when the price reached nearly $1,800.

"Call me old-fashioned, but I would rather invest in something that pays me to hold it than something that I have to pay to hold. As for the complete myth that gold is some form of insurance, it may be over the very long term, but frequently not over the short to medium term. For example, weak markets in 2015 have not set the gold price alight, and over the past three years the gold price has fallen by 32 per cent while world equity markets, as measured by the MSCI World index, have risen by 41 per cent."

An ETF Securities report earlier this month highlighted the split in opinion over gold, calling investor views "polarised". But there is no doubt that gold offers a good diversification for your portfolio and gold ETCs could be a cheap and liquid way to access it.

Tilney's favoured ETFS Physical Gold GBP ETC and dollar share class ETFS Physical Gold (PHAU) both physically own gold. They offer returns equivalent to the spot price of gold, less fees. Each individual security has an entitlement to gold held by its custodian, HSBC.

Our Investors Chronicle preferred fund is Source Physical Gold P-ETC, (SGLD), which aims to provide the performance of the spot gold price through certificated collateralised with gold bullion. Its tracking difference has been impressive in recent years and it is a cheaper fund, charging 0.29 per cent compared with 0.39 per cent for PHGP.

Other options include synthetic gold ETFs, which use gold futures contracts to generate returns, and currency hedged versions. However, these tend to be more expensive and the case for hedging is less clear when converting between two strong currencies (ie sterling and the dollar).

 

Performance of recommended gold ETCs (% total return)

 1-month3-month6-month1-year3-year5-year
ETFS Physical Gold GBPin GB2.17.7-2.4-0.3-30.3-12.7
Source Physical Gold USDin GB2.17.7-2.4-0.2-30.0-12.1

Source: FE Analytics, as at 2 November 2015