I have never been a gold bug, but I do get the argument for owning gold. Essentially, it is viewed as an ultra-defensive asset with a low (sometimes negative) correlation to movements in other asset prices.
Portfolio experts argue that gold’s “insurance value” can be combined with other growth assets to produce a less volatile return. Some suggest that a growth oriented portfolio should have an allocation of at least 5% to gold assets.
And because the gold price has been trending higher, recently hitting a multi-year high, there appears to be a strong case to own some.
Driving the recent surge in the price has been three tailwinds. Firstly, rising geopolitical tensions driving demand for ‘safe haven’ assets. Secondly, concerns about burgeoning global debt levels that are said to now top US$100 trillion. And arguably the most important of all, an expectation that Central Banks will be shortly cutting interest rates as inflation cools down.
Because gold doesn’t pay any income, there is a large “opportunity cost” for holding gold when interest rates are high. But as these falls, the cost of holding gold falls and demand arguably increases, leading to a higher gold price.
Assisting the gold price has been the realization that Central Banks have stopped running down their gold reserves and industrial/jewellery demand remains robust. As a commodity, supply considerations come into play, but because mining costs have been rising and lead times for new mines are long, demand factors have been driving the price. However, if the price keeps rising, supply forces will eventually become important.
Gold price per ounce in US dollars – 3/22 to 3/24
Gold price per ounce in Australian dollars – 3/22 to 3/24
Source: The Perth Mint
Let’s explore how to buy gold. Essentially, there are four ways to get exposure to gold.
1.Physical gold
You can buy physical gold through The Perth Mint or dealers such as ABC Bullion.
With the Perth Mint (www.perthmint.com/storage), you can buy gold coins or gold bars, and elect to take physical delivery of the bullion or have them store your gold securely under a custodial arrangement. The Perth Mint is backed by the WA Government.
You will need to open an account and undergo a mandatory ID check. If you open an account, you will probably want to open their Depository Online account. This allows you to trade gold online (potentially 24 hours a day), and generally has a tighter bid/offer spread than the phone or email service (known as their Depositary Program)
In addition to the bid/offer spread on the bullion, there are transaction fees. For the Depository Online account, they start at 1.0% on the value of a buy or sell transaction. For transactions over $1 million, the rate falls to 0.2%. Additionally, If you want the bullion specifically allocated to you (rather than unallocated), then the Mint charges a storage fee of 1% pa. Alternatively, you can elect to take physical delivery, in which case you will need to pay freight and insurance costs.
2.Exchange Traded Funds
An easier option for most investors is to buy units in an exchange traded fund (ETF). Two new ETFs have been added to the ASX in the last six months, taking the total number of funds to five.
All the ETFs are backed by physical gold and have a strong record in tracking the gold price. BetaShares QAU and VanEck’s NUGG hedge the currency exposure into Australian dollars, which means that it effectively provides exposure to the US dollar price of gold. The other three ETFs are unhedged, providing exposure to the price of gold in Australian dollars. GOLD and PMGOLD also allow for the units to be exchanged into physical gold.
3.Listed gold shares
Listed gold shares are highly leveraged to the Australian dollar gold price. Although some hedge part of their output and may have US dollar borrowings, most of their costs are in Australian dollars and tend to move in a narrower band. A small change in the equivalent Australian dollar gold price can have a huge impact on profitability and share price.
While there are scores of gold companies to choose from, many are gold explorers, and the sage old advice for investors is to look at high quality producers, particularly those with low production costs and strong reserves.
Our biggest gold producer, Newcrest, was recently acquired by US gold miner Newmont. Shareholders in Newcrest received shares in Newmont as part of the consideration. Newmont shares have a secondary listing on the ASX under the code NEM.
Listed below are the 4 largest gold miners by production and market capitalization. This includes Newmont which globally mines over 7 million ounces of gold each year. The table shows the consensus broker target price (source FN Arena) and the implied “upside potential” from the last ASX price.
Two important notes of caution. Firstly, target prices are highly sensitive to the brokers’ long term gold price forecasts. Secondly, the companies are not all pure gold miners (e.g. Newmont also mines copper).
Broker recommendations (buy/hold/sell), or sentiment, is another guide. The consensus recommendation is quoted on a scale of -1.0 being the most negative to +1.0 being most positive. The brokers are most positive on Newmont and Evolution and least positive on Northern Star and Regis Resources.
I have been a Northern Star fan, but the price has rallied quite strongly, and I think there may be better value with Evolution Mining (EVN). I am not disposed to owning a global miner in Newmont when the primary listing is outside Australia.
4.Gold mining ETFs
There are also two ETFs that track an index of gold mining companies. MNRS from BetaShares tracks the performance of an index comprising the largest global gold mining companies (ex-Australia), hedged into Australian dollars. Its top holdings include investments in Franco-Nevada Corp, Agnico Eagle Mines, Barrick Glod and Newmont. The management fee is 0.57% pa.
VanEck has the VanEck Gold Mines ETF (GDX). It is similar to MNRS in that it tracks global gold mining companies, but unlike MNRS, it includes Australian miners (weighting about 12%) and is not currency hedged. The management fee is 0.53% pa.
Bottom line
Risk takers might like to consider gold shares such as Evolution Mining. I think that for portfolio holders, the easiest way to own gold is through an ETF. The pick is the market leader, GOLD from Global X.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
