Rising prices boost hedge appeal of gold
Rising prices and increasing inflows to gold are boosting the appeal of the precious metal as a portfolio hedge for SMSF investors, according to an ETF provider.
Data from ETF Securities released on Friday showed inflows to gold ETFs had jumped dramatically, with ETF Securities’ Physical Gold ETF receiving $111 million of new asset flows in the year to date, while Perth Mint and Betashares’ gold ETFs had seen $19 million and $16 million of new flows, respectively, in July.
ETF Securities business development manager Chad Hitzeman said an increasing number of investors were looking to gold for capital preservation in portfolios, with the decline in bond yields making traditional fixed income investments less attractive.
“The rise of negative yielding debt, where investors with certain fixed income assets face losses, is re-shaping the investment landscape — so here, gold does have an increased appeal,” Mr Hitzeman said.
Gold prices had reached record highs in July as investors poured into the traditional safe haven amid turbulence in global equity markets, with the precious metal currently around $2,200 an ounce, the highest ever Australian dollar price.
Mr Hitzeman said while price fluctuations in the precious metal were notoriously difficult to predict, ongoing volatility in equity markets was likely to lead to further interest in gold as an investment.
“Where global trade issues remain, and where the opportunity cost of investing in gold is low — i.e. when risk-free rates are decreasing on cash — and where equity markets appear overvalued and are likely to face a return of volatility, gold prices are likely to remain supported,” he said.
For SMSF investors looking to use gold as a “buy and hold” portfolio hedge, Mr Hitzeman said best practice was an allocation of between 5 per cent and 10 per cent.
“The rationale for these weightings is they’ve been found to achieve portfolio goals such as improving the quality of an investor’s return,” he said.
“The reason for gold’s improving returns historically is it has had low to negative correlations with other assets. Therefore, when markets rise, gold can be expected to perform poorly; however, when markets fall, it can be expected to outperform equities.”