The recent rebound in the price of gold in light of heightened financial market volatility should serve as a reminder to investors of the “safe haven” properties that this precious metal can offer. What’s more, should more central banks resort to negative interest rate policy (NIRP) in the face of slowing global growth, gold’s safe haven status could take on added lustre.
Gold can play a safe-haven role
As seen in the chart below, the broad correlation between gold prices and global equities can vary over time. Both equities and gold enjoyed a broadly positive correlation during the commodity price boom (which ended in 2011), and which also tended to be associated with a weaker US dollar. With the recent phase of global equity market strength favouring non-resource sectors and the US dollar, the correlation between gold and equities since 2011 has turned more negative.
That said, irrespective of broad trends, recent history also suggests that gold has tended to act as a safe haven during periods of abrupt equity market volatility. Indeed, gold prices enjoyed particular strength during the early stages of the global financial crisis (before everything was sold in a desperate flight to liquidity) and gold again rose during the last decent US stock market correction in 2011. Gold prices have also bounced back solidly during the retreat in equity prices so far in 2016.
Negative Interest Rates could Enhance Gold’s Role as a Safe Haven
Central Banks Getting in on the Action
Central bank Net Gold Purchases
The BetaShares Gold Bullion ETF – Currency Hedged (ASX: QAU)
The BetaShares Gold Bullion ETF – Currency Hedged (ASX: QAU) provides investors with an easily accessible, “pure” exposure to the price of gold bullion. As an exchange traded fund which is bought and sold on the ASX like any share, QAU is an easier way of obtaining gold exposure compared to buying gold bars or coins and storing them in a bank vault or under the mattress. QAU is backed by physical gold bullion and provides the investor with a highly transparent investment, as the gold bullion bars held for the ETF are listed daily on the BetaShares website.
What’s more, QAU is currently the only gold ETF on the Australian market that is currency hedged, and so provides “purer” exposure to the gold price, which is denominated in U.S. dollars (i.e. investors do not need to also effectively bundle a “currency bet” into their investment thinking).
Note another important advantage of currency hedging – at least for as long as Australian interest rates remain relatively high by global standards – is that hedging currently gives Australian investors a performance pick-up that is not available with unhedged gold investment products. That’s because the act of hedging exposure to $US gold prices effectively provides investors in QAU with a “carry trade”. Since its inception in May 2011, for example, QAU has provided an after-fee outperformance of 1.2% p.a. compared to the $US gold price due to this ‘carry’.