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Gold index funds leap as bullion bounces back

The traditional safe haven of gold is doing well even though stock markets are calm and at all-time highs. So what are the best index-tracking funds if you want in?

Gold index funds leap as bullion bounces back

It’s been a good year to be a promoter of gold tracker funds. Since January, global exchange traded fund (ETF) investors have injected roughly £2.5 billion into the precious metal, according to TrackInsight data.

And they have been well rewarded as the spot price has jumped around 14% despite stock markets reaching record highs.

Often seen as a safe haven asset that typically sees more demand during times of market turbulence, gold has soared to around $1,300 per ounce, recouping losses it suffered shortly after the US presidential election in November 2016.

But in a benign market with major stock markets at or near all-time highs, why is the gold price going up?

Chris Darbyshire, chief investment officer at Seven Investment Management, said: ‘It could be related to the US dollar going down, as when the currency is weak, gold is strong. There is also a strong [inverse] relationship between real bond yields [which have fallen] and gold.’

Korea moves

Geopolitical risk is also a factor.

‘With North Korea posing a risk and Donald Trump being an unknown quantity, investors tend to clutch on in desperation to these ‘end of the world trades’,’ he said.

But the dollar’s decline has tempered the joy for UK investors. The $6 billion ETF Securities Physical Gold Fund on the London Stock Exchange is up just 2.5% in sterling terms since 1 January.

In Switzerland, the UBS ETF Gold hedged is up more than 10% in Swiss franc terms and investors have ploughed around £59 million into the £668 million fund over the same period.

Gold is not a long-term investment at 7IM, however, as Darbyshire said it has no significant industrial usage.

Another way to get exposure to gold is through gold miners and producers, whose shares can be accessed via a Ucits ETF. These can be often be geared plays on the spot price as miners’ profit margins tend to increase faster in a bull market for the metal.

The £398 million iShares Gold Producers Ucits ETF  has seen inflows of £70.7 million year to date. The fund is up 13% in dollar terms, equal to the S&P 500 this year, although investors will see lower returns because of a 0.55% fee, far more than mainstream equities ETFs charge. 

The case against

Despite recent demand for gold in the market, Alan Smith, a chartered financial planner at Capital Asset Management in London, said he did not invest in gold within his portfolios.

‘There are several reasons for this but can be summarised as saying that as a hedge against inflation, which is usually the main reason put forward to allocate to gold, it is inferior to a diversified portfolio of global equities or index-linked gilts,’ he said.

‘As a defensive asset class, investment grade bonds and gilts offer better defensive qualities, far lower volatility, along with an actual return, in the form of a coupon/yield. Gold provides no actual income or return other than a hoped-for increase in the underlying spot price and it also experiences significant price volatility which is unpredictable and hard to anticipate.’

Most industry participants remember when the price of gold tanked by 28% in 2013 – the worst collapse in 30 years – and ending a decade-long rally.

The spot price has slipped around 3% over the last two weeks. Are we likely to see future gold price volatility, given markets such as the S&P500 are often described as overvalued?

Darbyshire from 7IM had a suitably ambiguous answer: ‘That’s a bit like asking whether Donald Trump is really crazy.'

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