During the early part of this year, gold products struggled to gain regular weekly inflows but, over the past month, this appears to have changed with inflows of just over $1bn. This may be due to investors looking for portfolio diversification where geopolitical issues weighed on equity sentiment. So far this year a UK sterling investor would have seen negative returns on their Gold exchange traded product (ETC) of approximately -1.7%.
Investing in physical gold was often expensive for investors, particularly with respect to safe storage and it is a non-yielding asset. Innovation has led to new gold products, such as ETCs which makes investing in gold much easier by trading these products on global stock markets.
Both retail and institutional investors invest in gold in times of uncertainty. It can be difficult for investors to protect their portfolios against unexpected global events such as wars, political crises or shock election results – increases in geopolitical risk can drive gold prices higher due to its characteristics as a safe haven asset.
Governments and Central banks also have significant holdings of gold. Gold is mined on every continent except Antarctica, shipped around the world to be refined and sold to the central banks, institutional and retail investors, technology companies and jewellers.
The estimated breakdown of physical gold based on its use:
- Jewellery: (US$3.6 trillion) 47%
- Official sector: (US$1.3 trillion) 17%
- Bars and coins: (US$1.5 trillion) 20%
- ETPs and similar: (US$98 billion) 1%
- Other and unaccounted: (US$1 trillion) 15%
There are a number of ways to add gold to a portfolio. Gold can be held physically, via exchange traded commodities (such as the physically-backed products shown below) or by being backed by a derivative / swap agreement.
There are many European domiciled ETCs available to invest in, and in some of these products the assets have now reached billions of dollars.
ETCs can offer access to gold via a physically backed product in a cost-efficient and secure way to access the gold market by providing a performance return the same as the movements in the gold spot price less the total expense ratio (TER). The gold bars are held in vaults by custodian banks such as JP Morgan Chase Bank and HSBC.
The European-domiciled products below are available to UK investors which can be held in personal, SIPP and ISA accounts. These are physically backed gold products which have large assets under management in them. Any gains on these products will incur UK capital gains tax.
iShares Physical Gold ETC – this product was launched in 2011 as a physically gold backed exchange traded product and assets under management (AUM) have now grown to $3.3bn – this is the cheapest available with a total expense ratio (TER) 0.25%. The gold bars allocated in this ETC for investors are held in a separate account in JP Morgan Chase Bank’s vaults.
Invesco Source Physical Gold ETC – this product was launched in 2009 as a physically gold backed exchange traded product with assets under management now standing at over $5bn – the TER is 0.29%. The gold bars allocated for this ETC are held in a separate account in JP Morgan Chase Bank’s vaults.
ETF Securities Physical Gold ETC – this product was launched in 2007 as a physically gold backed exchange traded product with assets under management now standing at over $6.4bn – the TER is 0.39%. The gold bars allocated for this ETC are held in a separate account in HSBC’s vaults.
Gold Bullion Securities – this product was launched in 2004 as a physically gold backed exchange traded product with assets under management now standing at over $3.5bn – the TER is 0.40%. The gold bars allocated for this ETC are held in a separate account in HSBC’s vaults. There is a difference in this ETC in that investors can switch their securities directly for physical gold coins issued by the Royal Mint and delivered to the investor although there is an additional cost for this.
All of the above products are available to trade in both GBP and USD share classes on the London Stock Exchange. Lastly, there are Gold ETCs with GBP and EUR currency hedging in place but these have an additional cost associated with them of 0.26% and 0.16% respectively on top of the annual TER.
