What are Gold ETFs?
Investors love gold because it is a real asset like real estate. Gold ETF is an exchange traded fund that invest solely in the precious metal. It is designed for investors looking to add pure commodity exposure in the portfolio as opposed to owning an operating business. The return of the ETF mimics the movement in the gold price minus the annual expenses. There are also a seperate class of funds which owns a portfolio of gold mining companies in USD and hedged Australian dollar exposure.
There are 2 dedicate gold ETFs listed on the ASX. It is important to note that gold is a non cash generating asset so in the long run the returns are all made up from changes in the price of the commodity rather than a combination capital gain and dividends. The future value of the precious commodity is entirely dependent on what someone else is willing to pay for it at the time when the investor decide to liquidate the investment.
Investors can also take bearish positions on the metal by shorting these ETFs.
Exchange traded fund can be considered more advantageous than owning the future contract of the commodity directly. This is because future contracts are fixed unit contracts so every contract represent typically 1000 tory ounce of gold. Commodity futures is not the best option for those with a smaller portfolio or looking for just a tiny safe haven hedging exposure in the portfolio.
Also as the lives of futures contracts are measured in quarters, long term investors would need to continuously rolling the contract forward overtime. The quarterly forward roll has a cost in terms of either brokerage or rolling basis risk which are usually higher than management fees paid in a fund. Hence the benefit of using Gold ETF vs Gold Futures is the ability to manage the size of the position in the portfolio and lower overall cost for those that do not trade frequently.
Gold ETF vs Physical Gold
There are also number of benefits of owning Gold ETF rather than physical gold. The primary advantage of the listed fund is liquidity advantage where you can exit at any time when the markets are open. Any transaction of physical gold usually need to pass through a large bid and offer spread. There is minimal bid and offer spread on some of the best gold ETFs which means entry and exit costs are minimal.
On other hand, holding physical gold means that you would have to approach a reputable source to buy and sell gold. For large amount of physical gold, there is also an element of storage safety. Under the mattress or backyard is not considered the good practice! There is always risks in keeping a large amount of gold in your home as well. If it is held in the bank, there is also the cost of the safety deposit box.
The listed fund provides an cheap, liquid means with the hassle of storage.
Gold Investment Strategies via ETF
There are number of ways these ETFs can be used to take a directional position on the precious commodity.
- Shorting gold via the ETF. This is a efficient means benefit from fall in the gold price. Important to note a lot of retail brokers in Australia do not offer shorting and have to go through a sophisticated broker/advisor.
- Leveraged Gold ETF – A high risk strategy is buying gold ETF on margin which is effectively a leveraged exposure to the commodity.
We do not use gold as a hedge in our portfolio due to limit periods where it will outperform our broader equity positions.
Top ASX Gold ETFs
On the ASX there are two gold liquid ETFs investors can buy.
ETFS Physical Gold (GOLD) is a gold ETF that holds physical gold. The fund similar to gold is priced in US dollars and the returns are linked to the gold price and the changes in the Australian dollar.
Investors can purchases shares of the exchange traded fund on the ASX and they are redeemable for physical units from the ETF provider. Annual fees is around 0.4% with total value of more than $1 billion, it is the largest fund for the commodity listed on the ASX.
More importantly every unit of the fund owns a unit of physical gold unlike other commodity funds which owns the futures. Each financial security is allocated with separately identifiable gold bar which is deliverable. This means for those that want a piece of mind that the ETF is actually asset backed then this is the one.
Perth Mint Gold (PMGOLD) aim to mimc the gold price in Australian dollars. PMGOLD differentiate from the above fund being that the obligations of the fund are guaranteed by the Western Australian Government. The management fee is one of the lowest for a gold exchange product at 0.15%
BetaShares Gold Bullion ETF Currency Hedged (QAU) differentiate from the above two funds is it allows investor to to gain exposure to gold with fund it self hedging the FX exposure. Annual fee for the hedged gold etf is around 0.59% therefore QAU will track the gold price in Australian dollars. See below for the performance of QAU.
Gold Miner ETFs
Gold miners are an indirect exposure to the commodity. The goal of the miner is increase its value via production and exploration and hopefully distribute that gain to the shareholders.
There are three gold mining ETF listed on ASX and historically the performance of the fund has lagged the commodity.
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The key highlight from the list is VanEck Vectors Gold Miners ETF investing in the a portfolio of gold miners listed around the world. It is a global miner exchange traded fund.
Gold Miners vs Gold Price
Investors in the sector always ask what is better for the long term, buying gold miners or buying gold directy? The chart below shows the performance of the ETFs which owns the Gold Miners and Gold Directly.
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One of the interesting aspect of owning Gold Miners is that the volatility of the ETF is much lower as result of the underlying investments being operating business with cash flow and dividends.
Gold in US dollars
Gold as an investment can be a very polarizing asset. We are of the view that it can be a useful asset to preserve purchasing power only in certain circumstances where currency and market volatility are expected to be high.
Historically, the commodity moves inverse to the US dollar. It has been an outstanding asset classes post the financial crises as central banks reduced and kept cash interest rates at record lows. Those that have invested in gold would have weathered the depreciation in the US dollar. For Australian investors it would have outperformed during period where the Australian dollar fell against the US dollar as well.
It is important to note that for during the bull market leading up to the crises, gold under performed other asset classes by a mile and in some instances for decades. Although it had good recent since, the return still pales the long term equity market returns.
The best use for gold is for investors in economies where there are limited options to preserve purchasing power of their current asset. These are locations where the government cannot to manage the economy and capital restrictions exist (for example Venezuela).