The Federal Reserve has indicated it will embark on hiking interest rates and a tighter monetary policy. Nevertheless, gold exchange traded funds may still find a position in a diversified investment portfolio in the face of rising risks ahead.
“With rates rising, should the price of gold decline? I can see Eurozone based investors getting less enthusiastic about gold as the euro has been rising. That said, rising risk premia may be a positive for the price of gold. Because gold does not have cash flow, there’s also no greater discounting of future cash flows as risk premia rise. In contrast, stocks may well be under pressure as risk premia rise. This is an academic way of saying that gold may be a valuable diversifier should stocks suffer,” Axel Merk, President & CIO, Merk Investments, said in a research note.
Merk argued that the robust quantitative easing out of the Federal Reserve has served to compress risk premia, or diminished the spread between risky and so-called safe haven assets. For example, junk bonds trade at less of a premium over investment-grade debt, peripheral Eurozone bonds trade at a less premium over traditionally safer German bunds and equities are trading at higher valuations.
Consequently, more observers fear that winding down an ultra-accommodative policy could cause markets to revolt. While the Fed may have seen markets show a relatively calm reaction to recent small hikes, the eventual balance sheet reduction will likely fuel increased risk premia, Merk said.
During periods of balance sheet reduction and risking risk premium, stocks as risk assets may experience heightened volatility, especially given the heightened valuations in an extended bull market run.
In anticipation of potential risk-off events and heightened risk premia in an environment where the Federal Reserve is reducing its huge hoard of bonds purchased following the financial downturn, investors may want to consider gold-related investments like VanEck Merk Gold Trust (NYSE Arca: OUNZ) to diversify a traditional stock and bond portfolio.
Unlike other gold ETFs, OUNZ is the only ETF that provides its patented, physical gold delivery option, which allows investors to take physical delivery of gold bullion for shares of OUNZ. Each share of OUNZ is like holding a fractional share of physical gold, so investors are able to exchange shares for gold bullion whenever they desire. One share of OUNZ is the equivalent of 0.0099 ounces of gold. Potential gold share converters, though, should be aware that fees for physical delivery are significant.
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