When you think of gold, you probably picture an 18 carat gold necklace from Tiffany & Co.
What you might not know is only about half the demand for world gold is from jewellery. The other half is driven by demand from industrial use (e.g. for technology) and investment purposes (by governments, central banks and everyday citizens) who want exposure to the precious yellow metal.
Despite the amount of gold produced throughout history, you could still fit the entire world’s supply into a cube that measures 20 meters. That’s about the size of a tennis court. This is one of the reasons why gold tends to retain its perceived rarity and hold its value over time.
In this article we’ll cover:
- Why gold as an investment?
- How do you buy gold?
- Which gold ETF is best?
- What are the best gold miner ETFs?
- Verdict and conclusion
Why gold as an investment?
Gold is a key store of value playing an important role in any investment portfolio. It offers diversification benefits, especially when share markets fall or during periods of economic uncertainty. The coronavirus was a total shock to investors, but those who owned gold benefited from it’s safe haven status in reducing risk and increased defensiveness by cushioning the downfall.
Gold has proven to be a good performer in environments of low or negative real interest rates, or when interest rates minus inflation is negative. Gold is one of the few assets which has a negative correlation with shares during market downturns. Having assets with different correlations are key to enhancing investment returns and reducing risk.
How do you buy gold?
Traditional forms of gaining exposure to gold involved buying physical gold bullion (i.e. bars/coins) or owning shares in gold mining companies. However both options present challenges.
There’s a range of complexities with owning physical gold bullion such as storage costs, handling and insurance. It’s difficult to decide who should hold the gold for you – e.g. a dealer, safety deposit box, bank vault, or even in your own home. Investors might also face barriers of high minimum investment amounts, with low liquidity, and accessibility issues.
Gold mining shares, whilst easy to trade on the share market, do not provide the same defensive characteristics as physical gold. They have higher correlation to shares, and will not perform the same as physical gold. They are an indirect exposure to gold and can sometimes be more volatile.
One of the simplest and cost effective approaches to owning gold is through Exchange Traded Funds (ETFs). They are designed to offer investors a simple, cost efficient, and secure way to access physical gold by providing a return equivalent to the movement of the gold price, without the inconvenience and costs involve for transport, storage and insurance.
Which gold ETF is best?
Each year we compare all 200+ ETFs in our Australian ETF Report. Here we road test the best gold ETFs listed on the ASX:
- ETFS Physical Gold (GOLD)
- Perth Mint Gold (PMGOLD)
- BetaShares Gold Bullion ETF – Currency Hedged (QAU)
We compare them across 5 factors: size, costs and slippage, liquidity, returns, and track record.
All data in this blog is as of 30 September 2020.
GOLD is the largest gold ETF in the Australian market with over $2.1b in funds under management (FUM). It has benefited from large inflows over the last 12 months, with over $830m pouring into the ETF. PMGOLD is a third of the size while QAU has only $351m.
Costs and slippage
PMGOLD is less than half the cost of similar products, having the lowest management fee in this category with 0.15%. This is due to the smaller storage cost as a result of the structure of the ETF. QAU is the most expensive gold ETF given the additional cost of hedging back into AUD, which is useful for those who want to remove currency risk. However, the spreads on GOLD are much narrower, charging just 0.03% whereas PMGOLD and QAU have spreads of 0.15% and 0.09% respectively.
|ASX CODE||COST (INDIRECT COST RATIO)||BUY/SELL SPREADS (SLIPPAGE)|
One of the key advantages of using an ETF to gain exposure to gold is the ability to quickly buy and sell your investments. GOLD is by far the most liquid gold ETF, trading over $8m in average daily volume. PMGOLD trades at about a seventh of the size of GOLD, while QAU has ~$4m traded every day. Thanks to many large investment banks investing in GOLD, it provides ample liquidity for investors.
All gold ETFs have had a stellar year on the back of higher gold prices. QAU has done better than it’s peers over the last year benefitting from the stronger Australian dollar against the USD (as the ETF is currency hedged). Both GOLD and PMGOLD have delivered similar returns over the short and long term. PMGOLD has marginally outperformed due to its lower management fee.
|1 Year Return||3 Year Return (p.a.)||5 Year Return (p.a.)|
Track record and structure
GOLD was the first ETF in Australia to track gold, listing back in 2003. PMGOLD followed shortly after, with QAU entering the market in 2011.
Not all gold ETFs track the same thing with some not made up of physical gold. An important factor is the underlying structure of the gold ETF. You need to look under the hood to see if the gold ETF actually holds physical gold on your behalf or if it is getting the exposure via other means.
|ASX CODE||INDEX||ETF HISTORY (INCEPTION DATE)||Physical gold held in a vault in your name?|
|GOLD||LBMA Gold Price PM USD||March 2003||Yes – London, UK|
|PMGOLD||Spot Gold Price||May 2003||No – Perth Mint|
|QAU||LBMA Gold Price AM USD||May 2011||Yes – London, UK|
The major difference to watch out for is whether the ETF uses allocated or unallocated gold. Allocated gold means you hold the physical gold. Unallocated gold is similar to an IOU, where you only have the right to acquire it.
|Allocated Gold||Unallocated Gold|
|Who owns the gold||Investors||Issuer|
|Segregation||Yes – each gold bar has own individual identifier||No – holders not entitled to specific gold bars|
PMGOLD is an example of unallocated gold as the Perth Mint holds the gold on your behalf. Despite being backed by the WA government, if there was a default of the custodian bank, you would have to get in line with other angry investors to get your gold back. This means you have no ownership over it. Additionally, the bars can also be lent to third parties without consent of the individual investor. This is why PMGOLD has a lower management fee – they have smaller running costs given they don’t have to pay for physical storage.
GOLD and QAU are physically backed by gold bullion which are stored by fund managers in a vault on behalf of investors. Investors are unit holders of the funds and can redeem their investment at any time for cash or in exchange for gold bars. Both GOLD and QAU publish their bar list on the ETF issuer’s website which shows the bar identifier, refiner, weight and number of bars stored.
What about the best gold miner ETFs?
For investors who want exposure to companies that explore or mine for gold, there are two ETFs available:
- VanEck Vectors Gold Miners ETF (GDX)
- BetaShares Global Gold Miners ETF – Currency Hedged (MNRS)
GDX provides exposure to the ~50 companies involved in mining gold and silver. It is unhedged with a large focus on North America charging 0.53% per year and has ~$413m in assets.
MNRS is a hedged version that invests in ~50 companies engaged in gold, silver or other metal mining. It is slightly more expensive because of the hedging protection, charging 0.57% per year, and is much smaller than GDX after only accumulating $61m since launching in July 2016.
There is a large overlap of holdings between the two with half of the companies in both ETFs, although GDX has more Australian gold mining companies. Lastly, GDX has tighter spreads than MNRS (0.20% vs 0.52% respectively).
We’ve advised Stockspot clients to have an allocation to gold via the GOLD ETF since 2014. GOLD is physically backed by gold bullion which is stored in a vault in London that is allocated to investors. It’s unhedged so investors benefit from a falling Australian dollar. It provides the purest exposure to gold, being the oldest ETF in the market with the largest size, tightest spreads and plenty of liquidity.
Investing in gold-backed ETFs provides a liquid and cost effective access to gain exposure to the precious yellow metal. Having gold in your portfolio can significantly reduce how much you lose when markets are falling. It is the insurance you need to safeguard your portfolio, that can be easily accessed through an ETF on the ASX.