Precious Metal ETFs as a Risk Management Tool, Store of Value

If the economy continues to expand and the Federal Reserve remains complacent in its monetary policy, precious metals and related exchange traded funds may have a place in a well-diversified investment portfolio to hedge sudden risks.

“Against the current backdrop of stretched valuations, rising uncertainty, asset correlations, and record low volatility globally, gold demand as a risk overlay may continue to rise into 2018,” Maxwell Gold, director of investment strategy at ETF Securities, said in a research note. “In our opinion, gold’s role as a core risk management tool by providing diversification and a store of value is ever pertinent in this environment. Historically, gold has worn many hats on the risk management front including a hedge against market drawdowns, geopolitical volatility, systemic risk, inflation, and currency devaluation. Gold’s potential to serve as a dynamic, multi-faceted, and cost-effective portfolio hedge against many known and unknown risks may be a powerful tool for long term investors.”

In a bullish environment, Gold argued that high inflation along with a complacent Fed waiting on further confirmation that the recovery is ongoing and investor concerns of a disorderly Fed unwind could help lift gold to $1,445 per ounce. Comex gold futures are now trading around $1,250 per ounce.

On the other hand, Gold warned that in a bearish environment, the Fed could be more hawkish and push up rates aggressively and shrink its balance sheets at a quicker pace, which could pressure gold prices to the $1,070 per ounce level.