Nervous Investors Push Gold To 6-Year Highs With ETFs Preferred Vehicle
Despite the fact that equities markets have continued to defy gravity and perform well for investors, more money has also started flowing into gold and other precious metals – traditionally seen as safe haven investments. That’s pushed the price of gold to a new six-year high.
Market analysts believe that concerns around the U.S.-China trade war and the health of the global monetary system are preventing asset managers from going fully ‘risk on’, despite the relatively bullish equities market. And rather than sitting on the capital they are holding back from equities, many institutional investors are choosing to put it into precious metals.
The development of the ETC funds market is also playing a role. Exchange Traded Commodities funds work in basically the same way as ETFs but are invested in physical commodity assets rather than equities. They offer a cheap, simple and importantly, liquid, way to de-risk a portfolio with safe-haven exposure. ETCs invested in precious metals attracted inflows worth $9.7 billion over June – their highest level in around 3 years. Most of that inflow was allocated to gold.
In the past, the same asset managers may have turned to gold miners to perform the same portfolio role but that adds several additional layers of risk and complexity and has proven to be a relatively poor substitute for direct exposure to the commodity’s spot price. Over the last decade, an investment in physical gold would have returned 52%. Over the same period, tracking the FTSE All Share Gold Miners index - only 7% including compounded returns.
The rise in popularity of ETCs has proven a virtuous circle as more have come to market, pushing down already low management costs. Total expense ratios are now generally between 0.2% and 0.25% for precious metals ETCs and some have gone even lower. Companies are often using them as ‘loss leader’ products to attract new clients into other, more profitable instruments.
Smaller private investors are also showing more of an interest in precious metals as a portfolio stabiliser than they did so in the past. That development is a result of the increased availability of cheap, liquid gold and other precious metals-backed ETFs. A further influence is retail-oriented providers of physical gold that offer cheap storage and insurance. That gives investors the security of holding the physical asset without the space allocation inconvenience or risk of doing so at home. BullionVault, for example, offers insured storage for just 0.12% a year.
Gold and other precious metals have always been a slightly divisive asset class. One school of thought is that gold has ‘intrinsic’ physical value and as a result is safer than equities or other ‘imagined’ instruments of the financial markets. The opposing school of thought is that it is in fact the value of gold that is the more imagined with the precious metal having little intrinsic utility value and no income-generating qualities. However, history has shown that gold has tended to gain in value during market crashes and major corrections as investors flee to it as a refuge.
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