Ever since ancient civilisation first used gold as a currency, the precious metal has maintained an important role in the orderly function of commerce and markets all over the world. With the commodity’s scarcity and distinctive qualities playing a central role in its underlying value, it has long been viewed as a ‘safe haven’ on account of demand for the rare earth metal.
When it comes to financial markets, few assets are viewed with any sort of ‘safety’ and defensive resilience as that of gold. In fact, the commodity is typically a hedge against inflation and also in high-demand during ‘risk off’ periods. At the same time, however, the price of gold has increased 470% since 2000.
After a period of dormant activity for several years, gold suddenly burst into favour last year as trade tariffs, subdued economic growth and Brexit concerns weighed on investors’ minds. The same trend favouring gold played out during the GFC, Dot-com bubble and in the wake of September 11.
When the stock market begins to show signs of volatility, the natural disposition of many investors and traders is to gain exposure to gold. Whether such exposure is a part of your portfolio or a dedicated focus, its purpose is to act as a hedge to mitigate the impact of a falling market.
Here are the two options you can invest in gold on the ASX.
Gold has risen strongly over the past 20 years
While the practicality of holding onto the physical version of gold is limited for the everyday investor, ETFs provide significant liquidity and ease of access to invest in the rare earth metal. In fact, ETFs are considered the fastest-growing financial instrument across Australia, with the industry growing almost 50% last year to reach a total of $60bn in size, and on track for $100bn in 2020.
The ASX was actually the first market to introduce a gold-oriented ETF, the ETF Securities Physical Gold ETF (ASX: GOLD). This ETF debuted back in 2003 and since then, it has gained more than 330% and spurred on the creation of a number of other gold ETFs.
Investors who invest in ‘GOLD’ actually have ownership of shares assigned over more than 350,000 ounces of physical gold bars held with HSBC. Each share unit is equivalent to approximately one-tenth of the spot price of gold in Australian dollars. Similarly, ANZ ETFS Physical Gold ETF Fund (ASX: ZGOL) also boasts a 100% bullion backing, but with ETF units around one-hundredth the spot price of gold in Australian dollars. It goes without saying, a rise in the commodity sees a rise in the ETF.
BetaShares also operates a gold ETF, the BetaShares Gold ETF – Currency Hedged (ASX: QAU). As gold is typically priced in USD, the structure of this ETF involves currency hedging for local investors, so as to offset the impact of any forex fluctuations. Units in ‘QAU’ are purchased with Australian dollars, however, the ETF tracks the US gold spot price, and it is also 100% backed by gold bullion.
Another option is the Perth Mint Gold ETF (ASX: PMGOLD), which is structured differently to those mentioned. ‘PMGOLD’ acts as a ‘call’ option, giving investors the right to acquire a quantity of gold that has been assigned to the company managing the ETF. Finally, for a different take, the VanEck Vectors Gold Miners ETF (ASX: GDX) invests in gold miners rather than the underlying commodity.
Gold mining stocks
Investing in gold mining companies won’t give you direct gold ownership, however, it offers exposure to the commodity by way of that company’s operations. As gold miners specialise in extracting and selling the metal, your ownership in a gold mining stock is not only tied towards the gold mines or projects they own, but the underlying commodity they store.
The above point explains why gold mining stocks can sometimes be quite risky and volatile, where they may even contradict broader movements in the stock market as investors grapple between a ‘risk on’ and ‘risk off’ mentality. As such, mid-to-large cap gold miners tend to outperform when the market sees greater risk and begins to fall, albeit even gold stocks can get caught up in a sell-off.
Australia’s largest gold miner is Newcrest Mining (ASX: NCM), valued at almost $22bn. However, the ASX is also home to well over 150 other gold-oriented mining stocks, with ten currently valued in excess of $1bn. Apart from Newcrest, these include:
- Northern Star Resources (ASX: NST)
- Evolution Mining (ASX: EVN)
- Saracen Mineral Holdings (ASX: SAR)
- Regis Resources (ASX: RRL)
- St Barbara Limited (ASX: SBM)
- Silver Lake Resources (ASX: SLR)
- Gold Road Resources (ASX: GOR)
- Perseus Mining (ASX: PRU)
- Resolute Mining (ASX: RSG)
Beyond the names mentioned above, there is a long list of companies that are active in gold exploration and mining, ranging from mid-tier producers to speculative explorers valued at just a few million dollars. As one might expect, there is always risk when investing in shares, particularly those at the smaller-end of the scale, with unproven operations, no discoveries and limited cash.
Determining if gold has its place
Gold may be considered a more conservative investment than many other asset classes, however, its historical performance shows that gold has the potential to outperform across both short and long timeframes. In more volatile times, the value of gold has become even more desirable, meaning there are times where capital flows strongly towards the asset.
With that said, like all investments, you should weigh up the positives and negatives of holding an investment that offers exposure to gold. After all, there may be more stability associated with gold, but gold mining stocks are not necessarily immune to the wild swings of the market, while there could also be some opportunity cost holding gold ETFs when the market is in full swing. Ask yourself, what benefits might exposure to gold afford me and how diversified is my portfolio?
SelfWealth Ltd ACN 52 154 324 428 (“SelfWealth”) (Australian Financial Services Licence Number 421789). The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. Taxation, legal and other matters referred to on this website are of a general nature only and should not be relied upon in place of appropriate professional advice.