GOLD has more than doubled in price over the last five
years. In part, the surge in gold has been a function of it being a store of
value in times of crisis. More recently, gold has benefited from its reputation
as insurance against inflation.
If anything, the inflation stars appear to be aligning to
drive the yellow metal even higher. Not only has the US committed to
quantitative easing on repeat, but the largest economies all appear intent on
devaluing their currencies through accommodative monetary policies.
So what’s new? The difference now is that US banks are no
longer hoarding vast quantities of cash at the Federal Reserve. This is
evidenced by the increase in US broad money growth. In other words, banks are
finally providing new loans using the first and second rounds of quantitative
easing in the US – nicknamed QE1 and QE2 – never mind the most recent bout of
This new money filtering into the US economy sets the scene for price
inflation. The US consumer price inflation already started to ratchet up in
August this year – and the price-accelerating effects of the drought have yet
to wholly feed through.
In addition, the huge demand for dollars that helped to
mop up some of the supply at the height of the eurozone crisis has faded somewhat
as the situation appears to have stabilised.
With trade in physical gold bullion out of bounds, South
African investors who want a piece of the precious metal action are confined to
either gold mining shares or exchange-traded products (ETPs).
regulation uncertainties, rising costs, threats of nationalisation and labour
strikes – gold mining shares have lost some of their shine. Even though shares
offer the benefit of a dividend, ETPs currently appear to be a more attractive
To the ETP stable, Investec has added a new Exchange-Traded
Note – GOLDEN. What sets this new product apart from Absa Capital’s NewGold ETF
and Standard Bank’s Gold-Linker ETN, is that it allows investors to invest in
the dollar price rather than the rand price of gold.
A so-called Quanto feature
provides built-in exchange-rate risk. This means that a percentage move in the
gold price equates to a similar percentage move in the note.
“Previously investors had no choice but to hedge out the
effects of the rand if they wanted pure gold exposure”, says Brian McMillan of
Investec Structured Products. This resulted in additional complexity and cost.
Since an increase in the price of gold has tended to coincide with a
strengthening rand, and vice versa, McMillan says that “the problem with
investing in the rand price of gold is that it can distort the returns that you
Using existing products, investors may have made a significant gain in
the gold price, only for it to be negated by the rand’s move. “The price of
gold is hard enough to predict without having to add the price of the rand into
A further defining feature of Investec’s Gold ETN is the
cost. The total expense ratio (TER) of NewGold ETF is 0.4%, while the
Gold-linker carries a TER of 0.5%. The Investec Gold ETN does not have a
management fee, but rather a fee based on the daily Quanto charge. Currently
this is a minimal 0.001% per annum.
With an outstanding annualised return of 23.91% since
inception to the end of September 2012, NewGold’s top ranking market
capitalisation among the ETPs is understandable. However, performance is just
one of the factors that should be taken into account when considering an
Another key element in determining the optimal mix of
assets within a portfolio is risk. The dollar price of gold has tended to
exhibit a lower volatility than the rand price of gold that’s tracked by the
However, in terms of the products themselves, there is an
important distinction an investor should bear in mind.
Whereas NewGold is fully covered by holdings of gold
bullion, there is no recourse for ETN holders to the underlying assets, and
investors in ETNs are consequently exposed to the credit risk of the issuer.
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