As the reality of inflation has set in, many gold bulls have been disappointed that gold hasn’t truly taken off. For most of the past few quarters, gold’s felt pretty flat. Putting aside that there are plenty of securities that would kill to be merely flat in this market environment, it is worth digging into what is happening and what investors can expect from gold as they square what rate hikes, recession, and continued geopolitical uncertainty mean for the market.
VettaFi’s head of research Todd Rosenbluth noted that: “Advisors that had exposure to gold ETFs as part of their asset allocation strategy have benefitted from the precious metal’s relative strength year-to-date through mid-July. While down for the year, gold ETFs held up better than large-cap equities and investment-grade core bond products.” Gold has managed to do this despite a number of headwinds, including an increasingly strong U.S. dollar and rising rates.
Of course, gold’s has a reputation for being the ultimate inflation hedge, but Sprott’s John Hathaway noted in a recent Sprott Gold Report that gold “is not an inflation hedge. Instead, we believe gold offers a defense against the systemic risks that abound today, including the potential for sudden asset deflation.”
To use a soccer metaphor, it might be helpful to think of gold, and gold ETFs such as the Sprott Physical Gold Trust (PHYS), less as goalies and more as fullbacks. Goalies are given an extraordinary power that nobody else on the soccer field has — they can use their hands. But in exchange, they need to limit how far they range from the goal, as they are the last line of defense. A fullback, on the other hand, enjoys a more versatile defensive role. They aren’t confined to a small range or a hyperspecific job, and thus they have the power to play a wider defense. If you look at gold’s performance during equity market drawdowns of 15% or more, you begin to see its versatility.
Where to Find Gold Exposure
Gold also has a number of possible angles for exposure. You could invest directly in physical gold, or you could make an equities play through gold miners such as the Sprott Gold Miners ETF (SGDM) or the Sprott Junior Gold Miners ETF (SGDJ).
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