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A gold tracker that can hedge against uncertainty

Recession worries could soon push the gold price above its range-bound trading
A gold tracker that can hedge against uncertainty

Last week, a man in Thailand robbed a gold shop to cover his bitcoin losses. In terms of financial allegories, it’s hard to beat, as it follows years of talk of bitcoin and other cryptocurrencies taking over from gold as an inflation hedge. The unarguable arrival of inflation has put paid to that idea.

Tip style
Value
Risk rating
Medium
Timescale
Long Term
Bull points

Offers balance to negative real rates

Outlook points to higher prices

ETCs stability trumps gold miners

Tracker fees now even lower

Bear points

No dividends

Near all-time high sterling price 

But at the same time, interest has remained flat since a surge in buying in the weeks after Russia’s invasion of Ukraine. Judging by the rate of inflows into exchange traded funds (ETFs) and exchange traded commodity (ETC) funds, gold’s attraction is still well below levels seen in 2019 and 2020. 

Interestingly, gold buying in North America was strongest during the March tech rebound that saw the Nasdaq 100 gain 15 per cent and has mirrored the dip since. In recent weeks, the price has sat around $1,850 (£1,500) an ounce after spiking to over $2,000 in March. Even after factoring in the subsequent decline, its year-to-date performance looks positively sparkling put against the FTSE 350 and S&P 500 indices. With both equities and bonds out of favour, gold has remained a stable store of value. 

Additionally, for sterling-denominated gold holders the current price is actually not so far off the mid-2020 highs, given the strength of the dollar and weakness of the pound. That high was driven by investors piling into the precious metal at a globally tumultuous time, supporting the idea gold is “a portfolio stabiliser in times of highly volatile equity markets”, as per gold bulls Ronald-Peter Stöferle and Mark J. Valek, authors of the annual ‘In Gold We Trust’ report. 

Looking ahead, there are sensible reasons to be bullish on the price. But it is the metal’s security which is most attractive, especially when forecasts for growth are weakening and rising costs are set to blunt corporate cash flows. 

Offsetting this is the question of rising interest rates, increasing the appeal of cash, but there is still a gulf between core UK inflation of around 9 per cent and the domestic ‘risk-free’ rate, which Bank of England has set at 1.25 per cent. In the US, the Federal Reserve has made clear it will keep raising rates to curb its own inflation, though for now, ‘real’ interest rates remain negative and cash holdings are being eroded. 

In reaction, institutional buyers have already started to increase gold holdings. 

“Gold and silver accounted for the bulk of the net buying across the commodity sector last week as recession worries helped boost prices,” said Saxo Bank head of commodity strategy Ole Hansen this week, referring to hedge fund and other institutional activity.

 

The bulls 

The global macroeconomic outlook is not strong. We have covered this in recent weeks with an eye on equities to hold when growth slows or stops, as well as considering the outlook for heavily growth-weighted sectors like iron ore and copper mining. 

Industrial metal-exposed funds and shares have sold off by 15-20 per cent in the past month, which in turn triggered a shift in allocations at the CQS Natural Resources Growth and Income (CYN) investment trust.

“We are positioned for this current economic scenario, with a sizeable holding in gold and oil, having materially reduced our base metal exposure which we view as more economically sensitive due to a higher discretionary component of demand,” the trust’s Rob Crayfourd and Keith Watson told us. 

Other economic indicators that have driven upticks in net buying in recent months are back, thanks to the G7 leaders’ push to further limit Russian energy – and indeed, gold – exports. Key Chinese industrial indicators such as metals and steel inventories also remain bearish. "The only hope [for macroeconomic recovery] is China, where we are past the nadir in terms of activity. However, the pace of improvement is not enough to offset slowdowns elsewhere," argues BMO Capital Markets analyst Colin Hamilton. 

So if you want to follow the CQS lead, what is the best option for gold exposure? Gold miners can offer dividends and more rapid appreciation (or depreciation) than the product they sell, but for our inflation-hedging circumstances they do not fit the bill given their correlation with equity performance. 

That leaves ETFs and ETCs, which are quite similar when seen on a trading platform. The difference comes from the holdings, which in an ETF are more likely to be other securities, while the ETC holds the commodity itself. We would also avoid sticking gold bars under the bed, given the paper alternatives.

The Invesco Physical Gold ETC (which trades under the ticker SGLP for sterling-priced shares and SGLD for those in dollars) is linked to gold held in JPMorgan’s bank vaults in London, and is a strong contender given Invesco’s willingness to cut the fees. These are down to 0.12 per cent, from 0.19 per cent two years ago. iShares Physical Gold ETC (IE00B4ND3602) costs the same. 

A more sustainable offering, courtesy of HanETF’s Royal Mint Responsibly Sourced Physical Gold ETC (XS2115336336), is more expensive at 0.22 per cent, but the premium is for gold sourced from offcuts. The Invesco, iShares and Royal Mint ETCs all meet LBMA responsible sourcing rules, so the trade-off is whether you are willing to pay an extra 10 basis points in fees for recycled metal.

The Invesco ETC gets the nod here but there is little between the two cheaper options. 

 

Alternatives 

Gold’s endurance sets a high bar for any asset claiming to be an equivalent (or better) store of value.

While daily transactions are no longer done by exchanging metals or even paper representations, one important feature is its relative stability. Silver, by contrast, basically follows gold around, despite its greater industrial uses. Over the last year, it has both lagged gold, and seen greater volatility. 

Gold miners, as above, have plenty of other factors impacting their performance on top of the gold price: input costs, including fuel, and operational and political challenges in getting product out of the ground. 

This is apparent in the fortunes of London-listed gold diggers, which frequently test the patience of shareholders. In recent years, Egypt-based Centamin (CEY) has had to remodel its mine plan and cut production. Shanta Gold (SHG) has also lowered output expectations, although a maiden dividend and improving prospects, driven by higher prices and profits, has kept some investor faith alive. The less said about Resolute Mining (RSG) the better, given its struggles and weak performance even with gold over $2,000 an ounce. 

It’s not all rough. Endeavour Mining (EDV) has a strong claim to be succeed Randgold Resources in UK investor portfolios, while royalty groups like Wheaton Precious Metals (WPM) offer a good middle option – even if liquidity for its London-listed shares is weak.

But to many, gold’s role in a portfolio is to add insurance rather than walk the high-wire risk-reward tightrope familiar to mining investors.

Gold can be an emotional space, pushed by hawkers with special coins and late-night TV spots. But the current gap between the inflation and interest rates, alongside renewed institutional interest, a weak economic outlook mean simple gold exposure is worth having. Buying into Invesco’s gold ETC is a simple, and cheap, way to do that.

Invesco Physical Gold ETC (SGLP)
Price£144.38CustodianJP Morgan Chase, London
ISIN CodeIE00B579F325Typical number of holdings1
Fund typeOpen-endedMore detailsetfinvesco.com
Size$16.1bnOngoing charge0.12%
Launch date24/06/2009Yield-
Source: FactSet, Company
PerformanceETC ($ share class)Spot price ($)
1-yr*-3.4%-3.2%
2-yr6.1%6.4%
3-yr41.2%41.9%
5-yr43.7%45.2%
*To 31 May 2022. Source: Company