Political factors are contributing to gold's record-breaking run this year.Lemon_tm/iStockPhoto / Getty Images
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Gold’s glitter is back.
June Comex gold futures, which have been rallying since last fall, hit a record high of US$2,372.50 an ounce on Monday before retreating to around the US$2358-level.
Given a bullish outlook for the metal by some market observers, investors may consider playing gold through exchange-traded funds (ETFs) or similar products instead of buying bars and coins.
Jeffrey Christian, managing partner of New York-based commodity research and consultancy firm CPM Group, says he’s forecasting record annual gold prices for this year and in 2025.
“We are looking at US$2,050 an ounce or higher for an average annual price this year,” says Mr. Christian, who has been long-term bullish on the precious metal for the past three years.
Economic worries generally drive investment demand for gold, and a recession is still possible by year-end or in 2025, but “political factors are perhaps more important,” he says.
Gold has risen from the US$1,845-level following the Oct. 7 attack on Israel by the Palestinian group Hamas, as the ongoing war has raised concerns that the oil-exporting Muslim countries would use petroleum exports as political retribution, he says.
But there’s also political uncertainty because of the Russia-Ukraine war, U.S.-China tensions and what will happen following the U.S. presidential election in November, he says, as well as jitters about the decline of democracy in the U.S. itself and other countries.
Private investment demand has been more forceful in driving the gold rally in the first two months of the year as opposed to central banks, which are traditionally more price sensitive, Mr. Christian says.
Since 2021, investors globally have been reducing their gold holdings in exchange-traded products (ETPs) to buy more gold directly through bullion bars and coins, he notes.
Last year, investors bought 24 million ounces of physical gold but sold about six million ounces of gold bullion ETPs due, likely, to worries about financial market stability, Mr. Christian says.
Three U.S. banks collapsed last year while UBS Group AG rescued Credit Suisse Group AG.
“You have a lot of investors saying they want to be safer,” he says. “Physical gold is the most secure way to own gold.”
Daniel Straus, managing director of ETFs and financial products research at National Bank of Canada Financial Markets in Toronto, has also noticed that the amount held in gold-backed ETFs – particularly in the U.S. – has been declining since April 2022.
Investors may also be ignoring gold ETFs because of competition from surging U.S. stocks and some switching to bitcoin, also known as digital gold, for an inflation hedge, he says.
But sentiment may be shifting a bit. There was US$528-million of flows into U.S.-listed gold bullion ETFs in March – a reversal of a trend for the first two months of the year when there was US$4.6-billion in outflows while the price of gold was rising, Mr. Straus says.
“U.S.-based investors certainly tried to chase the recent performance,” he adds.
For investors wanting gold exposure, Mr. Straus suggests a 1- to 5-per-cent weighting in low-fee bullion ETFs within a portfolio, and that the gold position be rebalanced back to its targeted allocation.
Among Canadian-listed ETFs, he recommends CI Gold Bullion Fund VALT-T, Purpose Gold Bullion Fund KILO-T and BMO Gold Bullion ETF ZGLD-T. Management fees range from 0.16 per cent to 0.20 per cent.
Differences may stem as to whether they offer currency-hedged and U.S.-dollar versions or allow redemptions in physical gold bullion.
Gold equity ETFs are another way to invest in gold. They typically track the price of the metal, but are generally quite volatile due to operational risks, Mr. Straus says.
These ETFs’ returns depend on the performance of gold producers and explorers, if the mines are in politically stable countries, and when new mines will become operational, he says.
Gold equity ETFs are usually more expensive than bullion ETFs, he notes. The bellwether iShares S&P/TSX Global Gold Index ETF XGD-T has a management fee of 0.55 per cent.
Precious metal equity ETFs may be better for trading because they’re more tied to the business cycle, he says. If there’s a recession, equities are bound to decline and these ETFs would be affected, whereas a gold bullion ETF could continue rising, he says.
There are also some gold equity ETFs with a covered-call overlay that are popular with investors who want yield and are willing to forgo growth, Mr. Straus adds.
They include CI Gold + Giants Covered Call ETF CGXF-T, Hamilton Gold Producer Yield Maximizer ETF AMAX-T and Horizons Gold Producer Equity Covered Call ETF GLCC-T. All have the same management fee of 0.65 per cent.
Mike Philbrick, chief executive officer of ReSolve Asset Management Inc. in Toronto, is in the camp that sees strong fundamentals creating “quite a bullish case for gold” for the longer term.
The U.S. debt, which stands at more than US$34-trillion, was exacerbated by the money-printing in response to the COVID-19 pandemic and is “manifesting in some inflation issues,” says Mr. Philbrick, whose firm runs alternative investment funds.
“How much more gold has come into existence since we printed all that money? Not very much. That’s what makes it a hard asset – you can’t print gold out of thin air,” he says.
Geopolitics is also helping drive gold higher, notably after the U.S. and its allies froze US$300-billion of Russia’s assets outside that country in 2022 as part of sanctions for invading Ukraine, he says.
“It’s physical gold investors who are buying gold and stockpiling it in areas of the world that can’t be touched by the G7 nations due to these sanctions,” Mr. Philbrick says.
Gold is a hedge against inflation, a safe-haven asset and a diversifier, but given outflows from gold bullion ETFs in recent years, most people likely have little to no exposure to it, he says.
Any allocation depends on an individual’s risk tolerance and different schools of thought suggest anywhere from 2 to 25 per cent of a portfolio, he adds.
An alternative to investing in physical gold is through ETPs that offer redemptions in bullion subject to certain requirements, he says. Canadian-listed options include Sprott Physical Gold Trust PHYS-T, a closed-end fund, or Purpose Gold Bullion Fund.
Investors who are traders might consider owning Horizons Gold ETF HUG-T, which tracks gold through futures, Mr. Philbrick says. It has a low management fee of 0.20 per cent and an expense ratio of 0.35 per cent.
“Gold ETFs based in futures will generally be more liquid and have a tighter bid-ask spread,” he adds.
For long-term investors with no exposure to gold, he recommends perhaps buying one-quarter or one-third of a targeted allocation through ETPs and possibly adding on pullbacks.
But there are no guarantees that gold will fall sharply soon, he says. In 2005 and 2006, gold surged to about US$700 an ounce from about US$450 without a real pullback.
“This is a trade that hasn’t caught on yet,” Mr. Philbrick says.
“It’s an allocation that people have been ignoring because they’re probably looking at artificial intelligence, crypto or technology stocks. … We have been long in exposure to gold since March when a break-out occurred.”
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