Record gold price triggers ETF investor rush

Wealth advisers often recommend gold as a minor part of diversified portfolios. Picture: AFP

The price of gold has cruised past the $US2000 milestone to reach a new peak of $US2028 on Wednesday and retail investors are chasing it hard through Exchange Traded Funds.

In the local ETF market, two of the top six funds in terms of turnover in the last week were based on gold: ETFS Physical Gold and VanEck Vectors Gold Miners.

No wonder. The returns for gold ETFs when set against a volatile sharemarket are looking very attractive. Most ASX listed gold ETFs are up about 27 per cent this year to date, tracking the lift in the underlying price of bullion.

With ETF trends invariably set on Wall Street, the chances are high we will see more inflows to local funds over the coming months. Overseas, the inflows to gold ETFs are up 30 per cent already this year.

Globally, gold ETFs now hold more gold than many countries, including Germany. Overall gold holdings in the ETF industry rank second only to the US government.

How high will the gold price go? Nobody knows. What’s the value of a perceived safe haven at a time of turmoil?

But here’s the thing. The upward swing in bullion is not due to the onset of inflation as it has been during historic bull runs of the past such as the 1970s.

The most persuasive argument for gold is put by Goldman Sachs, which suggests a key part of the appeal of the yellow metal (or ETFs based on the commodity) is that it is increasingly being used by retail investors as an alternative to bonds or cash.

Here’s why. The argument against gold has always been that it does not pay an income. But just now bond and cash rates are at record lows and heading towards zero. On that basis, the arguments against gold as a “safe” alternative to shares and cash fall away.

Needless to say, those in the local gold industry are quick to agree. Jordan Eliseo of the Perth Mint says: “Gold actually trades like a bond and you can see it as a defensive asset — it has historically delivered positive returns in times of low inflation.”

The Perth Mint, which offers the ETF-like PM Gold product, does not offer a forecast gold price. But Goldman Sachs has a forecast gold price of $US2300, which is as good a guess as any.

If you want higher estimates you don’t have to look far, as many will call it higher. The author and commentator Jim Rickards is getting plenty of airtime with his forecast of $US15,000 by 2025 — which is ambitious but then again in a world of zero interest rates nothing is impossible.

Hopefully, the majority of gold focused ETF investors in the local market are in for the long term because the commodity is getting as volatile as the markets for which it is meant to offer an alternative.

In fact, on one technical measure, gold is now the most “overbought” it has been since 1999. Back then of course it turned out that gold was not a bad place to be as the dot.com crash of 2000 was looming.

Wealth advisers often recommend gold as a minor part of diversified portfolios, taking care to separate commodity based ETFs from gold miner-based ETFs, which ride on the fortunes of miners, which have wide variation in performance.