Gold bullion is traditionally the go-to asset during periods of heightened economic and geopolitical uncertainty. This time, gold equities appeal more.
On the economic front, rising bond yields this month have increased equity risks. They suggest high inflation and high interest rates might persist for longer than the equity market expects, as global growth bounces back faster than thought.
On the geopolitical front, the tragedy in Israel from Hamas terror attacks is heartbreaking. It feels trivial to write about the share market as the scale of the tragedy in Israel sets in and the risk of conflict in the Middle East escalates.
Who knows how this will end? The US is deploying an aircraft carrier and possibly another to the eastern Mediterranean in a show of force to support Israel. The US is also supplying arms to Ukraine in its battle against Russia. Let’s hope other nations don’t take advantage of this situation, with the US potentially tied up in two wars.
Gold (in US dollars) is up about 3% in the past week, after heavy falls last month. Gold bulls might have expected larger gains given escalating geopolitical uncertainty and the metal’s reputation as a ‘safe haven’ and store of value. Gold usually does well during periods of high volatility.
Gold’s big headwind is expectations that US interest rates might rise further from here, and the rallying US dollar. Higher interest rates – and thus rising competition from higher-flying investments – usually send gold lower because the precious metal does not pay a yield, although the relationship is not always clear-cut.
Higher rates in the US underpin a higher US dollar. A stronger US dollar relative to other currencies worldwide, which is the case now, tends to drive gold (which is usually denominated in US dollars) lower, and vice versa. Moreover, the US dollar usually benefits during crises as investors flock to the safety of the Greenback.
That’s the bad news. For gold bulls, the good news is an expectation that US rates have peaked or are close to peaking. Some good judges I know in currency markets believe the US-dollar rally this year is nearing its end.
Currencies are notoriously hard to predict, but the US dollar can’t rally forever, given the pain a high US dollar inflicts on other countries. Nor can US interest rates keep climbing without sending the US economy into recession.
Some big headwinds for gold this year could start to become tailwinds over the next six months. Investors will need patience as the rate outlook is far from certain and US-dollar strength continues to defy expectation. But combined with rising geopolitical uncertainty, the outlook for gold bullion – and by default, gold equities – is improving.
I normally favour investing in gold through Exchange Traded Funds (ETFs) that provide gold-bullion exposure and are currency hedged. This strategy eliminates equity-market, company and currency risk, and provides pure gold exposure.
In this instance, gold equities might be the better bet. Consider the performance two gold ETFs. The first, BetaShares Gold Bullion Currency Hedged, provides exposure to physical gold bullion. GOLD has an annualised return of -2.5% over three years to end-August 2023.
The second ETF – the Betashares Global Miners ETF Currency Hedged – has returned -10.7% over three years to end-August 2023.
Put another way, gold equities, on average, have underperformed gold bullion over this period. That’s largely due to cost blowouts, production issues and overpaying for acquisitions.
If I’m right and gold edges higher in the next six months, gold equities will look a lot more interesting.
Of course, buying gold equities means accepting equity-market risk (compared to buying gold bullion). The trade-off is the potential for higher returns if you pick the right stocks.
At this stage, I prefer getting exposure to gold equities through ETFs that invest in global gold companies. Here are two to consider:
- BetaShares Global Gold Miners ETF – Currency Hedged (MNRS)
MNRS tracks an index that comprises the world’s largest gold-mining companies (excluding those in Australia) and is hedged for currency movements.
The index comprises 44 gold companies, mostly in Canada and to a lesser extent the US. Key holdings include Franco-Nevada Corp, Newmont Mining Corp (which is acquiring Newcrest Mining in Australia), and Barrick Gold Corp.
If you want exposure to large-cap gold producers, MNRS is a convenient tool that is bought and sold like a share on ASX. The weighted average market capitalisation of companies in MNRS is $21.5. billion.
At end-August 2023. MNRS traded on a forward Price Earnings ratio of 14 times and a Price to Book ratio of 1.5 times. Neither valuation metric is demanding.
After soaring gains in 2019 and 2020, MNRS has drifted lower and is down almost 4% year-to-date. After three years of poor performance, MNRS should do better in the next 12 months as US rates and the US dollar peak, and gold bullion improves. MRNS’s management fee is 0.47%, which is reasonable for a hedged ETF.
Chart 1: BetaShares Global Miners ETF – Currency Hedged
- VanEck Gold Miners ETF (GDX)
GDX provides exposure to 52 securities through the NYSE ARCA Gold Miners Index (AUD). Unlike MNRS, GDX includes Australian gold companies such as Newcrest Mining, Northern Star Resources and Evolution Mining. Investors who own Australian gold stocks directly need to ensure they are not doubling up with GDX. Those who don’t have any gold equities exposure might find GDX more appealing (Australia has some terrific gold companies).
Currency hedging is the other main difference between GDX and MRNS (which is hedged). GDX has additional currency risk, but that can work in your favour, depending on your currency views.
A falling Australian dollar means offshore investments are worth comparatively more when repatriated home. But if the US dollar starts to come off, and the Australian dollar improves in the next 12 months, overseas investments could fall in value, necessitating currency hedging.
Of the two ETFs, I prefer MRNS due to its currency hedging and because it excludes Australian gold stocks, which can then be held directly in portfolios.
That said, both ETFs provide exposure to a diversified basket of the world’s largest gold producers, some of which have underperformed gains in gold bullion over the past three years and in some cases much longer.
GDX has an annualised return of -7.51% over three years to end-September 2023. GDX’s annual management fee is 0.53%.
Chart 2: VanEck Gold Miners ETF (GDX)
Source: Google Finance
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 11 October 2023.
