Newmont’s tilt for Newcrest has increased activity in gold but is it right for your portfolio?

From bullion to EFTs, a takeover bid for Australia’s biggest gold company, Newcrest, has sparked a new round of investor action in the precious metal.

Will the heat come out of gold if the US economy has a soft landing?

Despite gold’s reputation as an ­inflation hedge, the precious metal had a lacklustre 2022, ending the year pretty much where it started.

Will this year be any different?

With interest rates rising and a recession on the cards, analysts are split over the outlook.

For Australian investors, there are typically two big questions when it comes to buying into this asset class: Where do I invest and how much do I put in?

According to the World Gold Council, the “optimal” amount of gold in an Australian investor’s portfolio, on a risk-adjusted basis, is a hefty 14-16 per cent.

That’s a lot higher than the ­average portfolio allocation of less than 5 per cent.

Global X ETFs Australia head of distribution Kanish Chugh says there’s a wide range investors tend to allocate to the yellow metal.

“We have clients that have ­allocations as high as 15 per cent, some key institutional clients that allocate to gold strategically at 2.5-5 per cent and then those with tactically overweight allocations depending on market conditions,” he says.

From physical gold, to gold ETFs, to gold miners, there are many ways to buy in – each with their pros and cons.

Global X ETFs Australia head of distribution Kanish Chugh. Picture: Michele Mossop

ETFs are an obvious choice for many because they provide direct exposure and are highly liquid. Options in the local market include Global X’s physical gold ETF (GOLD), which has a market capitalisation of more than $2bn, and Betashares’ bullion offering, QAU.

Whether you choose hedged or unhedged can make a big difference here.

While the unhedged GOLD returned 6.3 per cent over 2022, QAU, which is currency hedged, declined more than 2 per cent.

Mr Chugh said the weaker US dollar contributed to the lift in gold buying in the first weeks of this year. GOLD, incidentally, is flat year to date.

“Investors globally buy gold in US dollars, so a weaker US dollar has traditionally resulted in a flurry of gold buying and in turn, price increases,” he said.

“The surge in central bank buying is also continuing thanks to strong activity leading into the end of 2022 and remains through the start of 2023.”

A recent investor survey from Global X’s US research unit, meanwhile, found a sense of optimism about gold’s outlook; 23 per cent of respondents said gold would be the best-performing commodity in 2023, followed by oil and gas.

Aside from bullion ETFs, investors looking for exposure can get it by investing in individual gold miners or gold miner ETFs.

In the local market, Newcrest is the star of the moment following the recent takeover offer from US-based Newmont.

While analysts see the current bid as opportunistic and too low, the bid revives interest in the gold sector and instantly put Australia’s biggest gold miner “in play”.

For investors seeking an ETF based on gold miners rather than gold bullion, the local offerings are VanEck’s Vectors Gold Miners ETF (unhedged) and Betashares Global Gold Miners ETF (hedged).

Betashares chief economist David Bassanese.

But some economists believed the shine was already starting to come off as the threat of even higher rates and a potential hard landing in the US weighed on the precious metal, Betashares economist David Bassanese said.

“If you think that central banks are close to the end of the tightening cycle and bond yields are going to drop, and the US dollar is going to remain weak, then that’s a good outlook for gold,” he said.

“So if there’s a soft landing in the US economy, it bodes well for gold.

“But if the Fed needs to get a lot more aggressive in raising interest rates – and there’s a good chance of that now given the payrolls data last Friday – then gold could take a leg down.”

Gold wasn’t the obvious inflation hedge many think it is, he cautioned.

But Mr Bassanese said there was still a place for it in the average investor’s portfolio.

“The beauty of gold is it can have a low correlation with equities, depending on the economic environment. So for diversification (purposes), a small allocation is useful,” he said.

But anyone eyeing gold miners should keep in mind that their share prices are influenced by a number of factors including drill results, profitability, costs, and management – as well as the gold price.

VanEck Asia Pacific chief executive Arian Neiron is bullish on gold’s near-term outlook, saying “there is more upside to the price of gold than downside”.