Got Gold? Investing in Gold ETFs
Investing in Gold dates back centuries. In the digital age, investing in gold is still popular. But people don't trade nuggets of gold anymore.
You can still trade gold bars that weigh about 400 ounce (around 12 kgs). But at A$1,550 / ounce, a full bar is worth around A$620,000 each.
Since few people have that kind of cash to throw into Gold, some smart folks created Gold ETFs.
What is a Gold ETF?
Similar to other ETFs, you usually buy a unit in a trust (or a structured product). Each unit you buy is backed by 1/10th or 1/100th troy ounce of gold. When you buy a unit of the Gold ETF, the trust buys the physical gold. The gold is then stored in an accredited storage facility, such as HSBC’s vault in London.
It’s kind of cool. The actual location of the vault is kept secret. Check out this cool video about the vault where they keep US$70B+ worth of gold.
Why invest in Gold ETF?
As an investment, gold price generally increases in value. Gold is still considered a good store of value. In the 10 years to June 2015, Gold achieved average annual return of 10.3% p.a. vs ASX’s 7.1%. Over the last 20 years, Gold returns 6.2% p.a. vs ASX 9.4% p.a.
Beyond asset returns, Gold is a good source of diversification in a balanced portfolio.
Looking back the last 20 years, Gold has a -0.20 negative correlation to the ASX. When the ASX is doing well, gold tends to fall. But when the ASX is doing badly, gold price will rise. All this reads well for Modern Portfolio Theory and sound long term investing.
The chart below shows the ASX 200 Total Return vs Gold price over the last 20 years.
What has happened to Gold recently?
Gold seems to perform particularly well in a portfolio during volatile markets - like now. During calendar 2015, Gold price fell from US$1,184 to US$1,062 - down 9%. But in AUD terms, Gold only fell by 4.5% as the Aussie $ depreciated against the USD.
Gold was negatively correlated to the ASX by -0.12 during 2015, continuing to be a good option of asset class diversification.
The chart below shows the Gold price in AUD vs the ASX 200 in 2015.
Gold ETFs in Australia
There are a few options to invest in Gold ETFs in Australia:
All four Gold ETFs are physically backed by Gold bullions, stored in a vault in London (or Perth in the case of PMGOLD).
Betashares' product is unique as it is hedged to AUD. This gives pure play exposure to gold and removes the currency risk of AUD / USD - the base currency of the other 3 Gold ETFs. But this currency hedging will have negative impact on returns when the AUD is falling.
The chart below shows the price performance of GOLD vs QAU. GOLD is the most popular and liquid Gold ETF, whilst QAU shows the impact hedging.
That's the 101 of Gold ETFs. If you want more info, check out the PDS of each of the Gold ETFs. They are a good option of providing diversification in an ETF portfolio. See what happens when you add Gold ETF to your ETF portfolio using our ETF portfolio builder.