Johann Erasmus | Executive Director | 1nvest | mail me |
In times of uncertainty, investors typically flock to safe haven assets, gold probably being one of the most known and talked about. This year alone has seen the price of gold soar nearly 19% as investors seek diversification from more traditional assets like stocks, bonds, or property.
Buying gold for many investors is a daunting prospect – one which is too often believed to be the sole purview of specialists, fund managers and banks.
This is however not the case and gold is a lot more accessible to retail investors through avenues like gold coins such as Kruger Rands, gold mining shares which has the underlying performance risk or Exchange Trade Funds (ETFs).
What are ETFs?
ETFs are exchange listed investment vehicles that provide investors, or ETF holders participatory interest in tracking the performance of an underlying asset or assets for example a ‘basket’ of shares, bonds, or commodities like gold.
Precious metal ETFs are designed to offer investors alike a secured, simple, and cost-efficient way to procure direct access to the precious metal market.
Because the precious metal ETFs hold the actual underlying metal in secure vaults, gold in the case of the Gold ETF, it provides investors a return equivalent to the movements of the rand gold price less the management fee.
Advantages
As each ETF represents about 1/100 of an ounce of gold, it provides investors the opportunity to acquire gold exposure for as little as R300 per ETF, allowing you to take large or small investments
There are many advantages to adding a precious metals ETF to an investment portfolio, including:
- Convenience: An easy way to gain exposure to rand spot returns of the underlying precious metal in small or large quantities.
- Liquidity: Liquid and traded intraday during exchange hours with Standard Bank providing intraday market making.
- Minimal tracking error: Returns of the ETFs are equal to the rand spot return of the underlying metal priced in rand minus low management fees.
- Physical ownership: Each ETF unit is secured by the corresponding physical metal held in a custody vault, providing peace of mind.
- Transparent to value: Precious metal prices and USD/ZAR exchange rate is published daily in major newspapers, TV, and other news sources, which is easy to follow.
- Segregated: The physical metal is stored in secure vaults and each ETF is guaranteed and has security over specific metal held by the custodian.
- Costs: The precious metal ETFs have some of the lowest management fees in the market.
Backed by real gold
Gold ETFs are backed by physical gold, stored, and insured in secured custodian vaults. Each gold ETF will have recourse to good delivery gold bars.
The gold is segregated, individually identified, and allocated. ETF is not allowed to introduce any outside risks into the gold ETFs including leasing of the precious metals.
By adding gold to a larger investment portfolio, investors will gain wider diversification of their assets, which ultimately works to offset market risks.
Gold and other commodities ETFs are risky but are generally good alternative asset classes to add to your portfolio because they often perform at an inverse correlation to more tradition assets like securities and add another liquid asset class that can easily be transacted.
In conclusion
The recent growth the Gold ETF highlights the staying power of gold in volatile climates. From 2019 the fund has grown from holding 5,912 oz of gold valued at R112 million to holding 111,674 oz of gold valued at R3,4 billion, in less than a year.
Gold will remain a go to investment for uncertain times. We have seen the stock markets drop sharply only to recover in a short period while gold has been increasing.
Currently we are experiencing one of the most volatile periods in recent history. Investors who seek a certain amount of stability in this period should consider gold and ETFs in particular.