The ongoing bull market has kept many focused on risk assets, but don’t forget about the potential benefits of diversifying a traditional stock and bond portfolio with alternative assets like gold exchange traded funds.
On the recent webcast (available on-demand for CE Credit), Gold Investing Outlook Continues to Shine, Juan Carlos Artigas, Director of Research for World Gold Council, noted that despite its recent pullback, gold has done relatively well so far this year, outpacing fixed-income assets and the broader commodity indices, especially with the ongoing pressure in the energy market.
“Behind gold’s performance, there’s been a combination of factors, including a weaker dollar; market uncertainty despite the observed low volatility environment; strong investment demand, especially in Europe; and a recovery in Asian demand from the weaker levels seen last year,” Artigas said. “However, the gold price also faced some headwinds as interest rates in developed markets have generally moved higher and inflation, seen as driver of gold by investors, has yet to pick up.”
While inflows and investment interest in gold have not been as high as they were last year, gold continues to plod along this year on increased demand for a volatility hedge. George Milling–Stanley, Head of Gold Strategy at State Street Global Advisors, pointed out that investors bought an additional $1.3 billion in shares or equivalent to 37 tonnes of gold during the first half of the year. Investors interested in gaining exposure to gold price moves have turned to the popular SPDR Gold Shares (NYSEArca: GLD) as an easy way to access the gold market.
“What investors are telling me is that they are continuing to use gold to counterbalance their increased exposure to stocks and other riskier assets. And the data supports this,” Milling–Stanley said.
Looking around the world, gold demand has been particularly strong out of Europe this year, notably from Germany, the United Kingdom and Switzerland. Artigas pointed out that European gold-backed ETFs attracted 130 tonnes or around 70% of this year’s inflows. This may be attributed to the increased political risks around general elections and Brexit talks, which may have safe-haven demand.
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While investment demand has increased in recent years, especially with the advent of easy-to-use gold ETFs, jewelry remains a driving factor in global demand at 54% of the average annual demand, compared to 30% for investment, 10% for technology and 6% from central banks.
Furthermore, the developing countries remain the largest source of physical demand at 70% of total world consumption, with China at 24% and India at 24% making up the top markets. Looking ahead, the World Gold Council anticipates the Indian economy to adapt to a so-called General Standard Tax and a better Monsoon season, which could add to stronger gold demand for the year. Additionally, the World Gold Council expects investment demand in the form of bars and coins to increase in China.
Many have also been concerned about the potential negative effects of rate hikes on gold prices as higher rates increase the opportunity cost of investing in gold. However, Artigas pointed out that gold returns have historically been positive on average when real rates are up to 4%.
“The reality is that rates are still quite low from a historical perspective worldwide. In addition, the market is pricing only a 50/50 chance of another rate hike by December,” Artigas said.
With higher rates ahead, though, some are still concerned of the traditionally inverse relationship between the U.S. dollar and gold.
Nevertheless, investors who are still interested in gold but are wary of the negative relationship with a stronger greenback may consider the SPDR Long Dollar Gold Trust (NYSEArca: GLDW, prospectus), which debuted earlier this year. The new gold ETF may help investors gain exposure to gold bullion price movements to hedge against potential market volatility, without worrying about the negative effects of a strengthening U.S. dollar.
“Just like GLD, GLDW is 100% backed by physical gold, and that is the only asset both ETFs hold,” Milling–Stanley said. “But as the name indicates, GLDW seeks to offer investors a long position in gold priced not in dollars, like GLD, but rather in as basket of six foreign currencies. These currencies are the euro, the yen, the pound, Canadian dollar, Swedish krona and the Swiss franc. The new ETF was designed to counter the potential for a strengthening dollar to have an adverse impact on the performance of gold priced in dollars.”
Financial advisors who are interested in learning more about the gold market can watch the July 25 webcast on demand here.