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As the Novel Coronavirus pandemic has spread, we have seen continued interest in gold for asset allocation usage and as a trading thematic. Given its popularity in times of economic stress, we thought it worthwhile to re-examine the case for gold given the current market uncertainty.
Economic thematic #1: COVID-19 central bank easing
Central banks around the world have loosened monetary policy to their effective lower bounds, and have started quantitative easing, putting further downward pressure on interest rates.
Historically, interest rates and the gold price have been negatively correlated, as gold is typically seen as a store of wealth when prospective returns on interest-bearing investments are low. Additionally, given the large amount of negative-yielding bond instruments in circulation, the opportunity cost of holding gold has significantly reduced.
Economic thematic #2: Grim outlook
The impact of the COVID-19 outbreak on economic prospects has been severe. Worldwide lockdowns have hit confidence, travel, and spending outlooks harder than any other modern crisis.
In March, the Secretary General of the Organisation for Economic Co-operation and Development (OECD), Angel Gurría, said that the OECD’s latest estimates showed the lockdown will directly affect sectors amounting to up to one-third of GDP in the major economies. According to the OECD’s calculations, for each month of containment, there will be a loss of 2 percentage points in annual GDP growth1.
What does this mean for gold?
We believe there is a strong argument for gold as a portfolio diversifier.
As we wrote in late February, in uncertain times, many investors historically have turned to gold as a haven. If investors are pessimistic about equities, based on the expectation that slowing economies will have an impact on earnings, gold may well be a beneficiary. As a portfolio diversifier, gold has tended to provide negative correlation to falling equities markets.
Notably, against the backdrop of COVID-19 uncertainty, coupled with a reigniting of trade tensions, gold has rallied 17.6% from 20 March 2020 (peak virus panic) to 25 May 20202, as markets began to digest the economic reality that could potentially befall the worldwide marketplace. At the time of writing the gold price had jumped to levels last seen in 2012, with President Trump suggesting he could cut ties with Beijing.
On the flip side, central bank interventions and onshoring of supply chains in response to this crisis may in fact lead to expectations of higher inflation in the longer term, potentially increasing demand for gold as an inflation hedge.
To hedge or not to hedge?
Assuming one is interested in investing in gold, the key question then becomes, to invest in a hedged or unhedged gold exposure?
This is ultimately the investor’s choice and depends on their individual circumstances, but it’s important to note that a currency-hedged exposure to gold represents a way to maintain spot gold exposure without being at the whims of currency fluctuations.
The advantages of this were seen clearly over the course of the GFC, when strength in the Australian dollar against the U.S. dollar meant A$ hedged gold significantly outperformed unhedged gold exposures. The same pattern could be emerging within the current crisis, where initially the U.S. dollar was treated as a safe haven asset, and the value of the Australian dollar plummeted. If we see a similar rebound in the Australian dollar over the course of a global recovery, investors with an unhedged gold exposure may find themselves disappointed in the performance outcome.
A scenario like this played out in April. Over the month of April, the BetaShares Gold Bullion ETF – Currency Hedged (ASX: QAU) returned 6.5%3, while unhedged gold bullion returned approximately 1%4. The chart below shows the performance of A$ hedged gold bullion vs. unhedged gold bullion from 1 April 2020 to 15 May 2020, demonstrating the significant impact currency movements can have in even a short period of time.
Hedged vs unhedged gold: 1 April 2020 to 15 May 2020 (common base = 100)
Source: Bloomberg. Past performance is not indicative of future performance.
Of course, the equation has another side – in periods where the Australian dollar is falling, unhedged exposures will outperform hedged exposures. The main aim of currency hedging is not so much to take a position that the A$ will strengthen, but to achieve a ‘purer’ exposure to gold, minimising the influence of exchange rate movements, and substantially reducing a source of uncertainty.
How to gain exposure to gold
There are a couple of options for investors looking for a currency-hedged exposure to gold through an ETF.
One is exposure to gold itself i.e. gold bullion, that might be held specifically to provide diversification from equities. The second option is to invest in a portfolio of global gold mining companies that is often seen as a way of providing leveraged exposure to a rise in the gold price.
The BetaShares Gold Bullion ETF – Currency Hedged (ASX: QAU) is the only $A-hedged gold ETF solution available in the Australian market. It is physically backed by gold bullion held in a vault with JP Morgan Chase in London. The bullion bar list is published on our website.
Over the 12 months to 30 April 2020, QAU returned 29.5%5.
The BetaShares Global Gold Miners ETF – Currency Hedged (ASX: MNRS) provides $A-hedged exposure to the largest global gold mining companies (ex-Australia). It provides diversification away from the concentrated Australian gold mining sector, which makes up only 10% of the global gold mining market.
Over the 12 months to 30 April 2020, MNRS returned 73.6%6.
There are risks associated with an investment in the Funds, including:
- in relation to MNRS – market risk, international investment risk, mining sector risk, concentration risk and currency hedging risk; and
- in relation to QAU – market risk, gold price risk and currency hedging risk.
For more information on risks and other features of each Fund, please refer to the applicable Product Disclosure Statement.
1. www.oecd.org, Statement for the G20 Videoconference Summit on COVID-19, 26 March 2020.
2. Source: Bloomberg. Past performance is not indicative of future performance.
4. YCharts. “Gold price in Australian dollar.” YCharts., 15 May 2020, ycharts.com/indicators/gold_price_in_australian_dollar.
5. Past performance is not indicative of future performance.
6. Past performance is not indicative of future performance.