Gold futures have shot up since the middle of March. The hike has taken forward gold prices from below $1,200 per ounce to about $1,255 as investors fret about multiple geopolitical factors.
From Aztecs, Incas and Mayans to Ian Fleming’s Goldfinger, gold exercises a curious hold over the human imagination. This is a commodity that behaves like a currency, and in uncertain times, investors typically reach for gold's safe haven qualities to escape volatility.
Flows into gold-backed exchange-traded products (ETPs) show this. ETPs are an umbrella term that cover any exchange-trade fund or commodity.
SAFE HAVEN IN TROUBLED TIMES
Chris Mellor, executive director at Source ETF, says that during the ‘risk-on’ sentiment among investors towards the end of last year (confidence in the markets), this led to outflows from gold products. But he adds ‘as geopolitical risks continue to worry politicians and investors alike, we fully expect gold flows to continue’.
Source ETF has seen its Source Physical Gold P-ETC (IE00B579F325) show inflows of over half a billion dollars since the start of the year. Like any other ETP, it is traded daily just like stocks but tracks an underlying asset, in this case gold prices. The price of gold has risen about 7% since the start of the year, an increase reflected in the value of Source's ETP.
Gold has a solid history of providing a relatively safe home for cash during difficult times. At the beginning of the financial crisis following the collapse of Lehmans Brothers in 2008, gold bullion prices rocketed, soaring 70% to $1,900 an ounce in 2011.
As financial markets stabilised, gold prices began to fall, losing around a third of its value from 2011 to 2013.
LEVERAGE IS IMPORTANT
Investing in gold isn't necessarily straight-forward. Holding physical bullion is impractical for most investors - the storage charges alone would be extremely costly.
That makes gold funds an obvious route, yet it is also important for investors to look under the bonnet of the fund, particularly at its leverage policy.
Leverage is the scope for the fund to borrow money to invest in an asset, but moves against the investors can run up bigger losses than original stakes. Many gold ETPs are leveraged, so it's an important point to check.
EQUITIES, DIVIDENDS AND THE GEARED EFFECT
Last year gold funds performed well. For example, the MFM Junior Gold (GB00BH57BR88) returned 107% in six months.
This is a fund that invests in gold mining companies, so it also benefits from company dividends which it passes on to fund investors.
However, mining company share prices are often more sensitive to underlying gold prices. For example, between 2011 and 2015 the price of gold declined 21% yet the FTSE Gold Miners Index saw 75% wiped of its value.
If investors believe that market confidence may come under increased pressure through the rest of 2017, gold could be a good home for investors.
Some analysts are even predicting a new bull run for gold, so decent returns are entirely possible. However, gold could back-fire as an investment if the appetite for equities and other high risk but higher return options remains robust.
