Gold at record high: pros, cons and the ETF options

Why gold is at a record high and ETF options for investors who believe the purple patch will continue. 

In July, gold reached a new all-time high of $1,983.45 per ounce. The precious metal has been performing well since around late 2018, which has picked up further this year. As Mobeen Tahir, associate director of research at WisdomTree notes, the yellow metal has outperformed the S&P 500 by 28% this year.

There are several reasons for this. The most obvious one is that gold is a safe-haven asset. Investors like to buy it when the world economy and financial markets appear to be under threat. There has been no shortage of such risks this year. Most notably the Covid-19 pandemic has forced economies around the world to close. On top of this, geopolitical tensions have increased, be it the deterioration of China and US relations or the risk of war in the Middle East.

However, as well nervous sentiment driving up the price of gold, its attractiveness has also increased due to the continued fall in US treasury yields.

In response to the virus, central banks around the world have further cut interest rates and restarted quantitative easing. This loosening of monetary policy has driven yields on bonds to new lows, with many bonds providing returns that are negative in both real and nominal terms. That has made gold comparatively more attractive. As a store of value bonds are often favoured as they pay a coupon whereas gold does not. But with yields at, near or below zero, their attractiveness over gold is decreased.

Others argue that investor enthusiasm for gold reflects declining confidence in major currencies due to huge fiscal and monetary response of governments and central banks to Covid-19. For instance, Ned Naylor-Leyland, precious metals fund manager at Jupiter Asset Management notes: “Recent monetary loosening, the swelling of central bank balance sheets, and the spike in government spending in response to the coronavirus may finally have tipped investors over the edge in their distrust of fiat currencies – especially the US dollar.”

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The fear is that unprecedented levels of government spending, made possible by central banks buying bonds as part of their quantitative easing programmes, is akin to printing money. This, some argue, will eventually result in inflation and undermine faith in the US dollar. Gold is supposedly a way to protect against this. Naylor-Leyland notes: “When the tawdry, threadbare garments of the greenback are torn aside to reveal the debt-riven skeleton beneath, investors naturally turn to the solidity of gold, and the brightness of its noble sibling.”

Not so fast

However, investors should be cautious of jumping into gold. Predictions of loose fiscal and monetary policy unleashing inflation and undermining the dollar were regularly made in the wake of the 2008 financial crisis. Those fears helped gold rally until about 2012, when it became clear that inflation was not rearing its head. On top of this, as previously noted, there are still plenty of structural drivers keeping inflation in advanced economies low. 

Added to that, investors should also be cautious about jumping into gold just after it has reached a new all-time high. Of course, gold may continue to rally for some time yet. Geopolitical risks are not likely to go away and bond yields look likely to stay low for some time yet. Such things, however, are impossible to product with any certainty.

Pros and cons of investing gold  

At times of market stress, often caused by wider economic uncertainties, it makes sense for investors to ensure that they are adequately protected, and one way to achieve this is through seeking out investments that are genuinely uncorrelated to the fortunes of equity markets.

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Over the years, the precious metal has proved its value when it comes to protecting portfolios from volatile markets. Indeed, as Adrian Ash, director of research at BullionVault, points out, the gold price has risen in eight of the 10 years since 1970 that the FTSE All Share has lost value on a total returns basis, including each of the five years when the index fell by 10% or more.

Against those benefits, though, gold does not have a yield, nor does it generate cash flow or profit. Instead, its price simply reflects what the next person is prepared to pay for it, so it tends to be volatile. It is a Marmite investment – some investors love it, but others would not touch it with a bargepole.

ETF exposure to gold

However, those convinced of the need to add some gold exposure to their portfolio have several ETF options. The most popular gold ETFs are Exchange Traded Commodities (ETCs), which physically hold the actual commodity they are tracking. In the case of gold this will the actual gold bars. A popular option is the iShares Physical Gold ETC(LSE:SGLN), a member of the ii Super60 rated list, with a fee of just 0.16%. A similar option is the Invesco Physical Gold ETC (LSE:SGLP), which charges 0.19%.

Other investors, however, may prefer to track the share price of gold producers. After all, if the price of gold goes up so will the earnings prospect and share price of the companies involved in taking it out of the ground and selling it. 

One option is the iShares Gold Producers UCITS ETF(LSE:SPGP), which tracks the S&P Commodity Producers Gold Index for a fee of 0.55%. A similar option is the VanEck Vectors Gold Miners ETF(LSE:GDX), which tracks the NYSE Arca Gold Miners Index  for 0.53%.

For those looking for something a little riskier, VanEck Vectors also offers the VanEck Vectors Junior Gold Miners ETF(LSE:GDXJ). This ETF tracks the MVIS Global Junior Gold Miners Index, an index that provides exposure to the micro- and small-cap segment of the gold and silver mining sector. The ETF’s ongoing charge is 0.55%.

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