With inflation set to stay, and the Fed seemingly on the brink of a tightening policy error, it seems like a great time to invest in gold. Ned Naylor-Leyland, Head of Jupiter’s Gold & Silver Strategy, explains why he chooses to gain exposure to the ‘risk-free’ asset through bullion funds rather than exchange-traded products like ETFs and ETCs, and why an actively managed approach could offer greater benefits to investors.
Ideal time for gold investing
For some time, many of the key factors have been in place for a bull market for gold and silver, with inflation rising to 7% in the US and rates barely moving, yet an expected gold bull market never materialised, as it was general believed that inflation was ‘transitory’. While the US Federal Reserve continues to threaten to ‘normalise’ rates, it does seem improbable that it can do so without risking market stability. However, if the market wakes up to the fact inflation is unlikely to go away any time soon, or that rates cannot be raised to the extent expected, we would expect to see a big rally for gold and silver.
Exchange-traded products: Where’s the gold?
So, now seems like a good time to ask, what’s the best way to gain exposure to bullion, the ‘risk-free’ asset? In Jupiter’s Gold & Silver Strategy, we prefer to gain exposure to physical gold (and silver) through bullion funds – more specifically, Sprott physical bullion trusts – as opposed to exchange-traded products like ETFs (exchange-traded funds) and ETCs (exchange-traded commodities), for several key reasons.
Exposure to the physical metal:
By investing in a gold (or silver) ETFs and ETCs, investors are shareholders of trusts, and these shares represent a paper claim on the metal accounts of the banks involved, rather than the physical asset. The investor does not have direct beneficial ownership of specific bullion and has no option to exchange their shares for the physical metal.
This nuance, among others, is why we choose instead to invest in fully allocated gold, which is stored outside the highly leveraged ‘bullion banking system’ (the gold business of the big banks). The Sprott bullion trusts that we use only custody their metal with the Royal Canadian Mint, and while they cost a little more in terms of TER, we are happy to pay a premium for the custodial comfort blanket of being outside the systemic mainframe.
What we have noticed, however, is that the ebb and flow of Gold ETF inventories, for example, nicely tracks institutional sentiment towards the asset class and these waves are secular in nature (see below). As such, there have been only a few trend changes of note since the big Gold ETF GLD was launched in 2003 (annotated). We are watching the recent uptick in Gold ETF inventories as a potential signal that the withdrawals and weak sentiment seen since Q3 2020 may be shifting. Bullion trust investors tend to be stickier, quality-focused and sensitive to NAV discount/premium, so there isn’t such a clear pattern to follow – one to watch for sure in 2022.
Total known ETF holdings of gold vs gold price
Source: Bloomberg, 03.02.2003 to 10.02.2022
Taking an actively managed approach
By taking a flexible and dynamic approach, as market conditions evolve, we adjust our allocations to gold, silver and mining equities. Given the current backdrop, around 60% of the Jupiter Gold & Silver Strategy is held in gold, while 40% is held in silver, and currently 78% is allocated to gold and silver mining equities. We choose to blend our gold exposure with silver as the latter offers the potential for higher returns than a pure gold allocation, typically increasing in value faster than gold when precious metals are rising (and declining faster when prices are falling). Central to the actively managed approach is our geographic focus on the Americas and Australia, both for operational de-risking purposes, but also to best navigate the increasingly important ESG and sustainability framework that investors expect us to engage with.
Governance matters: We choose to take exposure to gold and silver bullion that is stored and traced to the highest global standards, outside the banking system. Likewise, we only invest in mining companies that operate to the highest standards of governance and employee welfare. We don’t believe that generic ETFs or ETCs are able to offer such assurances either when thinking about bullion or mining equities.
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