Getting into the Gold ETF Rush

While volatility has come down from its high in March, it remains elevated as countries around the world work to stop the spread of the novel coronavirus. The uncertainty surrounding the pandemic has caused investors to seek safe havens, and inflows into gold exchange-traded funds (ETFs) have soared. For investors – who may prefer not to have to handle, store and insure cumbersome gold bars – spot bullion and gold miner ETFs can serve as a valuable source of diversification during this unprecedented time.

“Gold is definitely going to be an asset that will be a safe haven in these times of uncertainty. If you're looking for things that hold value, gold's the place to do it,” said Joseph Cavatoni, managing director of USA and ETFs for the World Gold Council.

Cavatoni highlighted several areas of focus when it comes to investing in gold, including risk and uncertainty, “which is a huge strategic driver of what happens with the gold price,” as well as interest rates and monetary policy. 

As volatility rolled through the global marketplace, and the Fed responded with almost unlimited quantitative easing (QE), investors rushed to gold, and gold ETFs, in particular, flourished. “Global gold-backed ETFs and similar products added 298 tonnes, or net inflows of $23 billion, across all regions in the first quarter of 2020 – the highest quarterly amount ever in absolute U.S. dollar terms and the largest tonnage additions since 2016,” according to the World Gold Council’s data and research resource, GoldHub.com.   

Investment demand for gold-backed ETFs will dominate the marketplace and dictate the price trend, Collin Hamilton, managing director of commodities research at BMO Capital Economics said at the digital World Gold Forum, according to a report by Kitco News. Hamilton expects gold ETFs to remain attractive because they provide investors with “clean and quick access” to gold, Kitco reported.  

“Investors are looking at gold, not only as a safe haven from stocks and bonds, but also as a dollar inflation hedge,” Steve Oh, head of ETF Listings and Product at Nasdaq, said during a recent #TradeTalks interview. “ETFs are a democratizing investment vehicle that allows a broad stretch of investors access to many asset classes otherwise unavailable to many investors.”  

Chris Dhanraj, head of iShares Investment Strategy at BlackRock, echoed that sentiment, noting that the key questions investors have been asking center around the diversification benefits of gold, as well as the low or negative correlation to equities, fixed income and the dollar. He also noted that the Fed’s recent announcement of a renewal of QE has brought back the idea of gold as an inflation hedge and possibly a deflation hedge.  

“If we look at the past 10 years, gold has had little correlation to equities, only about 1% correlation with U.S. equities. But importantly, it has a negative correlation to the U.S. dollar,” said Dhanraj. “Gold as an asset class is a bet on inflation and deflation, and also a bet on liquidity.” 

There are two primary ways to play gold ETFs: ETFs that represent spot gold, such as iShares Gold Trust or (IAU) or SPDR Gold Shares (GLD); and gold miners that extract and sell the gold ore, including the iShares MSCI Global Gold Miners ETF (RING).  

“There is a correlation in movement between the price of the spot gold and the gold miners,” said Oh. “When gold goes up, the stock prices of the gold miners will as well. The miners who mine the ore, they can sell the ore for a higher price, and, therefore, realize an increased profit.” 

For ETFs that track spot gold, investors will find that they will have “pricing behaviors that track the metal” and will not be affected by other factors, such as the performance of a company, noted Cavatoni.  

Oh acknowledged that one of the challenges that miners face is the increased magnitude of price movement, which indicates that the miners are going to be more of beta play.  

“Some of this is reflected in that gold mining companies will carry company- or industry-specific risks, including leveraged credit as well as product demand,” Oh said.  

As investors look for exposure to gold, it’s critical to consider asset allocation within a portfolio. While every investors’ portfolio is unique, allocation to gold in a range between 2% and 10% in a diversified portfolio in fairly standard, according to Cavatoni.  

“The other thing that I'd add is as the stimulus starts to feed its way into the system, it's not a time to sell your holdings of gold. It's a time to continue to understand why it benefits your portfolio broadly,” Cavatoni said. “Even when we move away from where we are today, which is highly volatile and hugely emotional in terms of the sentiment and behavior of investors today, you'll find that gold will continue to perform as it has over the last 20 to 30 years, providing long-term returns.”