What is Gold ETF?
Gold ETF is an exchange traded fund that invest solely in the precious metal. From the performance perspective, the gold ETF best designed for those that are looking to include the metal in your portfolio as a hedge. The return of the ETF mimics the movement in the gold price minus the annual expenses. These funds only hold the physical commodity it self and does not invest in the equities of gold miners.
There are 2 dedicate gold ETFs listed on the ASX. It is important to note that gold is a non cash generating asset (unlike dividend ETF or bond ETF which invests in assets which pays regular dividends or income). The future value of the precious commodity is entirely dependent on what someone else is willing to pay for it at the time when the investor decide to liquidate the investment.
Investors can also take bearish positions on the metal by shorting these ETFs.
Exchange traded fund can be considered more advantages than using commodity futures to gain exposure to the commodity. For example future contracts are fixed unit contracts so every contract represent typically 1000 tory ounce of gold. Commodity futures is not the best option for those with a smaller portfolio or looking for just a tiny safe heaven hedging exposure in the portfolio.
Also as the lives of futures contracts are measured in quarters, long term investors would need to continuously rolling the contract forward overtime. The quarterly forward roll either in brokerage or rolling basis risk would be an additional cost in holding gold verses a straight forward ETF position. Hence the benefit of using Gold ETF vs Gold Futures are its ability to manage the size of the position in the portfolio and lower overall cost for those that do not trade frequently.
Gold ETF vs Physical Gold
There are also number of benefits in using Gold ETF rather than physical gold. The primary advantage of the listed fund is the intraday liquidity. Any purchase of physical gold requires a large bid and offer spread. There is minimal bid and offer spread on some of the best gold ETFs. This means for investors there is little entry and exit cost.
On other hand, holding physical gold means that you would have to approach a reputable source to buy and sell gold. There will be a large spread from the start to compensate the seller.
For large amount of physical gold, this also means it has to be stored safety. Under the mattress or backyard is not considered the good practice. There is always risks in keeping a large amount of gold in your home as well. If it is held in the bank, there is also the cost of the safety deposit box.
The listed fund provides an cheap, liquid means of tracking the gold price.
Gold ETF Trading
Here some examples of using trading gold ETFs. The precious metal can be considered a safe heaven position in a investment portfolio. Although we personally do not use it. Its safe heaven status means it usually outperform during periods of risk off or where the market is looking for safety.
Alternatively, shorting gold ETF can be used as a strategy to take advantage in the fall in gold price. Important to note a lot of retail brokers in Australia do not offer shorting.
We do not use gold as a hedge in our portfolio due to limit periods where it will outperform our broader equity positions.
ASX Gold ETFs
Note because the Gold is priced in US dollars, the performance of the funds are linked to changes in gold price and changes in the Australian dollar.
ETFS Physical Gold (GOLD) is a gold ETF that holds physical gold. Investors can purchases shares of the exchange traded fund on the ASX and they are redeemable for physical units from the ETF provider. Annual fees is around 0.4%.
BetaShares Gold Bullion ETF Currency Hedged (QAU) allows investor to to gain exposure to gold with fund it self hedging the FX exposure. Annual fee for the hedged gold etf is around 0.49%. By hedging the currency exposure, QAU will track the gold price in Australian dollars.
At the time of writing we are not aware of an exchange traded funds that invests in gold futures listed on the ASX.
|ETFS Physical Gold ETC||GOLD|
|BetaShares Gold Bullion ETF Ccy Hedged||QAU|
Gold Performance in US dollars
Gold as an investment can be a very polarizing asset. We are of the view that it can be a useful asset to preserve purchasing power only in certain circumstances where currency and market volatility are expected to be high.
Historically, the commodity moves inverse to the US dollar. It has been an outstanding asset classes post the financial crises as central banks cut and kept cash interest rates at record lows. Those that have invested in gold would have weathered the depreciation in the US dollar. For Australian investors it would have outperformed during period where the Australian dollar fell against the US dollar as well.
It is important to note that for during the bull market leading up to the crises, gold under performed other asset classes by a mile and in some instances for decades. Although it had good recent since, the return still pales the long term equity market returns.
The best use for gold is for investors in economies where there are limited options to preserve purchasing power of their current asset. These are locations where the government cannot to manage the economy and capital restrictions exist (for example Venezuela).