Gold ETPs continue to present opportunities

Jun 28th, 2016 | By | Category: Commodities

Following last Thursday’s EU Referendum result the price of gold rallied, rising 6.6% on Friday to hit $1,337 an ounce. But while prices may now look saturated there could still be upside and exchange-traded products could offer investors another way to access the precious metal.

Credit Suisse lists SPDR Gold Shares Covered Call ETN (GLDI)

There is still upside in the gold price and access via ETPs

In the wake of the announcement that the UK had voted to leave the European Union, the S&P 500 and FTSE 100 fell 5.3% and 5.68%, respectively.

However, the S&P GSCI Gold Total Return, which is a sub-index of the S&P GSCI providing investors with a reliable and publicly available benchmark tracking the COMEX gold futures, gained 4.9% between 24th – 27th June, its best performance since August 2011. Similarly, the Bloomberg Gold Sub index Total Return, which reflects the return on fully collateralized future positions, rose 5% From Friday to Monday. The ETFS Gold ETP (BULP), which tracks the Bloomberg Gold Sub index TR and has a total expense ratio of 0.49%, returned 17% in the same time frame, according to data from Bloomberg.

James Butterfill, Head of Research and Investment Strategy at ETF Securities, said: “Exposure via ETPs is a practical way to get exposure to gold…. We now believe the fundamentals remain supportive for gold despite the broad positive sentiment. Sentiment, as demonstrated by CFTC positioning, is also not bullish relative to gold and therefore is an alternative, attractively valued safe haven asset.

Despite the gold price now retreating – following its two day surge – ongoing market uncertainty is likely to keep demand for gold strong for some time, which will be reflected in elevated speculative positions.

Butterfill explains that assuming a modest USD appreciation of 5% and speculative positioning remaining elevated at around 200,000 contracts, gold is likely to be trading at around $1440 an ounce by June next year. “In the absence of any US Dollar appreciation, gold could trade closer to $1500 an ounce,” he says.

Physically-backed gold ETPs have also performed well over the last few days. The iShares Physical Gold ETC (SGLN), which has a TER of 0.25%, returned 17% from last Thursday to Monday. Similarly, the ETFS Physical Gold (PHAU), which has a TER of 0.39%, rose 4% over the same period. These ETPs are physically backed, which means that if investors want to take physical delivery, although rare, it can be arranged.

While the shock results of the EU Referendum saw investors heading for the yellow metal, it may not be the only reasons to invest in gold.

Jodie Gunzberg, Global Head of Commodities and Real Assets at S&P Dow Jones Indices suggests that now may be a good time for gold and gold miners not only for diversification properties, but for its ability to hold up to a strengthening dollar and that it is seasonally a good time for gold.

“Gold holds up well independently of the stock market. It also rises 32.5 basis points on average for every 1% the dollar rises, even though it rises much more, 3.5% for each 1% the dollar falls. Last, the 3rd quarter is historically the best for gold, gaining 4.7% on average, which is 40 basis points more than the S&P GSCI index in past 3rd quarters.

“In history when the S&P 500 has fallen more than 10%, gold has gained about 60% of the time rising about 3% per month. Also if stocks fall more like 20% then gold gains more than double returning about 6.5% monthly. This plus its positive performance with the rising dollar and its best quarter coming, could drive it gold higher than in prior index history (gold levels at about $1800) given we haven’t seen an event like Brexit before,” she said.

Butterfill adds that by looking historically at gold we can see why investors continue to view the asset as a safe haven during what we would deem ‘shock events’….  “Whilst not every event delivers positive gold returns, on a relative basis and on average in absolute terms, gold is an effective hedge against these shocks,” he said.

For example, in 1974, when President Nixon resigned, gold returned 22.4% one year later vs. world equities at 5.6%. Similarly, in the global financial crisis of 2008, gold returned 21.5% one year later vs world equities at -13.1%.

Other ways investors can protect themselves is via “US Dollar, Yen, and the Swiss Franc, which have all been used by investors as they seek safe haven assets as Britain’s decision to leave the EU has left the world in shock,” adds Butterfill.

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