REASONS TO ADD SHINE TO YOUR PORTFOLIO WITH GOLD

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Molly Morrison
5 years ago
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3 REASONS TO ADD SHINE TO YOUR PORTFOLIO WITH GOLD Gold prices have enjoyed their share of highs and lows in recent years, due to both the China-led

market volatility and very low interest rates.

1 3 REASONS TO ADD SHINE TO YOUR PORTFOLIO WITH GOLD Gold prices have enjoyed their share of highs and lows in recent years, due to both the China-led commodity cycle over the previous decade, and more recently because of gold s renewed status as a desirable safe-haven asset in today s era of financial market volatility and very low interest rates. This special report outlines three major reasons why Australian investors might consider adding some lustre to their portfolio through the inclusion of gold exposure. DAVID BASSANESE BetaShares Chief Economist, August 2016 Not only is the current gold price outlook quite positive, gold exposure can also help dampen the overall volatility of your portfolio returns over the longer-term. What s more, it s never been easier for Australian investors to simply and conveniently invest in gold just as easily as buying a listed company share though exchange traded funds (ETFs). 1

2 01 GOLD PRICES ARE LOOKING UP! Gold prices enjoyed a particularly strong run-up during the China driven commodity price boom over the decade to Indeed, from this longer-term perspective, the global financial crisis of 2008 only provided a short-term disruption to the upward march in prices. In more recent years, gold prices have retreated somewhat due to a slowdown in the Chinese economy and persistent low global inflation, despite extensive central bank policy easing wordwide. That said, as seen in the chart below, gold has enjoyed a price resurgence in 2016 so far, as exceptionally low (and in some cases negative) global interest rates and ongoing financial markets jitters has added to gold s allure as a safe haven asset. GOLD SPOT PRICE $US/OUNCE: JANUARY 2000 JUNE 2016 $US/Oz $0 Jan-00 Jan-05 Jan-10 Jan-15 Source: Bloomberg, BetaShares. Past performance is not an indicator of future performance. Indeed, the fact that many central banks around the world now have aggressively loosened monetary conditions - through quantitative easing and very low official interest rates - has heightened investor concerns about inflation over the longer-term (which would tend to push up gold prices), while also making it relatively more attractive to hold gold as a safe haven asset compared to cash or bonds. If global interest rates stay low and equity market volatility continues, gold prices could well remain supported. 2

02 GOLD IS A HANDY PORT IN A STORM! One of gold s long-standing attractive investment qualities is that it has tended to act as a safe haven during periods of abrupt equity market volatility.

3 02 GOLD IS A HANDY PORT IN A STORM! One of gold s long-standing attractive investment qualities is that it has tended to act as a safe haven during periods of abrupt equity market volatility. Recent history is a case in point: as seen in the chart below, 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 Gold prices have also bounced back solidly during the retreat in equity prices earlier this year. $US GOLD SPOT PRICE AND S&P 500 INDEX: JANUARY 2007 JUNE 2016 Gold price $US [LHS] US S&P 500 [RHS] 2,500 2,000 1,500 1, Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 0 Source Bloomberg, BetaShares. Past performance is not an indicator of future performance. Gold s price behaviour so far this year to 31 July suggests it may be a major beneficiary of (and so act as a hedge against) further bouts of global market volatility. Indeed, Indeed, global equity markets face a growing array of challenges, including elevated valuations, sluggish earnings growth, and a maturing in the economic expansion of the world s leading economy, the U.S. If America s economic expansion continues, equity markets will eventually be challenged by the need to lift U.S interest rates to more normal levels. Equally, however, a sudden faltering in the U.S economy also poses downside risks to both U.S stocks and the U.S dollar - both of which could be gold supportive. Note if gold prices tend to rise when equity markets tend to weaken, the overall effect of adding exposure to gold is to potentially reduce the overall volatility of one s portfolio returns. So irrespective of where gold prices may go over the short-term, one fact remains: gold offers a potentially useful source of portfolio diversification. 3

4 03 IT S NEVER BEEN EASIER TO INVEST IN GOLD! These days, investors interested in gaining gold exposure don t really need to worry about buying gold bars, coins or jewelry however nice they might look on the mantel piece. You also don t need to go to the trouble of lugging your gold holdings off to the local bank safety deposit box to avoid the risk of it being lost or stolen. These days, there are easier options available. Physically Backed Gold ETFs Much more conveniently, for example, investors can now gain direct $US gold exposure through the purchase on the local share market of a gold-backed exchange traded fund, hedged for currency movements, as provided by the BetaShares Gold Bullion ETF Currency Hedged (ASX Code: QAU). The BetaShares Gold Bullion ETF effectively buys and stores gold on behalf of investors. QAU invests its assets into the purchase of physical gold bullion (i.e., bars of gold), which is then held in an account maintained with JPMorgan Chase Bank N.A, in JPMorgan s London vault premises. $US GOLD SPOT PRICE AND THE $A: JANUARY 2006 JUNE 2016 $US/tonne Another important feature of 0.50 $US Gold Spot [LHS] QAU is that it provides currency 0.40 $US per $A [RHS] hedged exposure to gold. That s 0.30 important because, as seen in Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 the chart on the right, there has Source: Bloomberg, BetaShares. Past performance is not an indicator of future performance. tended to be a positive correlation between the $US gold price and the Australian dollar over time: in general, in periods when the gold prices has risen, the Australia dollar (as a commodity currency ) has also risen and vice-versa. That means in periods when the gold price is rising, Australian investors in gold, without currency hedging, could miss some of the upside potential due to foreign exchange losses from their offshore investment exposure (conversely, currency hedged exposure will tend to weigh on returns in periods when the gold price is falling). Another benefit of currency hedging is that it actually offers investors a performance pick-up over time to the extent that Australian interest rates remain relatively high by global standards. That s because hedging effectively involves borrowing foreign currencies (to offset the foreign currency exposure from investment on global share markets) and using the proceeds to invest in Australian dollars, usually at a higher rate than the cost of borrowing. As at mid-2016, this income pick-up was worth around 0.25% per year. In other words, Australian investors in QAU are at present actually paid to reduce their currency risk by hedging exposure to fluctuations in the U.S dollar against the Australian dollar. USc

5 Global Gold Mining Shares Another valid option is to invest in gold mining shares, whose fortunes are naturally closely tied to the gold price. One advantage of investing in gold miners as distinct from gold bullion they produce is that even over periods in which the gold price is relatively stable, gold miners may still be able to generate good profits and positive investor returns, provided prices are high enough to cover their production costs. Investing only in the Australian gold sector alone, however, doesn t really offer much in the way of diversification, as there s only a handful of locally listed companies to choose from, such as Newcrest Mining, Evolution Mining or Regis Resources. With that in mind, the BetaShares Gold Miners ETF Currency Hedged (ASX Code: MNRS) has been created to provide investors diversified exposure to leading gold miners across the globe and, importantly, also on a currency-hedged basis. MNRS invests in approximately 40 of the world s largest gold miners outside of Australia, which at end-june 2016 had a combined total market capitalisation of $A325 billion. As might be expected, the Index which MNRS aims to track has followed the direction of the $US spot gold price reasonably well, and has enjoyed particularly strong performance in 2016 (to July) even given only a relatively modest rebound in gold prices. $US GOLD SPOT PRICE AND THE MNRS INDEX: MAY 2006 JUNE 2016 $US/Oz $US Gold Spot [LHS] MNRS [RHS] Index = Jan-2006 Index Source: Jan-06 Bloomberg, Jan-07 BetaShares. Jan-08 Past Jan-09 performance Jan-10is not Jan-11 indicator Jan-12 of future Jan-13 performance. Jan-14 Jan-15 Jan-16 0 About BetaShares BetaShares Capital Ltd ( BetaShares ) is a leading Australian manager of funds which are traded on the Australian Securities Exchange. BetaShares offers a range of exchange traded funds which cover Australian and international equities, cash, currencies, commodities and alternative strategies. As at August 2016, BetaShares has approximately $3 billion in assets under management. BetaShares is a member of the Mirae Asset Global Investments Group, one of Asia s largest asset management firms. Mirae currently manages in excess of US$75B. This information has been prepared by BetaShares Capital Ltd (ACN AFS Licence ) ( BetaShares ). This is general information only and does not take into account the individual circumstances, financial objectives or needs of any investor. Before making an investment decision, investors should consider their circumstances, the PDS for therelevant financial product, and obtain professional financial advice. The PDSs for BetaShares Funds are available at or by calling Only investors who are authorised participants may invest through the PDSs. Other investors may buy units in BetaShares Funds on the ASX. This information is not a recommendation or offer to invest in BetaShares Funds or any other financial product or to adopt any particular investment strategy. An investment in any BetaShares Fund is subject to investment risk and the value of units may go down as well as up. Any past performance shown is not an indication of future performance. Future results are impossible to predict. This document may include opinions, views, estimates and other forward-looking statements which are, by their very nature, subject to various risks and uncertainties. Actual events or results may differ materially, positively or negatively, from those reflected or contemplated in such forward-looking statements. Opinions and other forward-looking statements are subject to change without notice. Any opinions expressed are not necessarily those of BetaShares. To the extent permitted by law BetaShares accepts no liability for any errors or omissions or loss from reliance on the information herein. 5 Find out more by visiting

Global MAY 2016 ASSET CLASS PERFORMANCE: COMMODITIES STORM BACK DAVID BASSANESE, CHIEF ECONOMIST. Market Outlook

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