Interview: The case for investing in gold via ETFs

Jessica Amir
April 30, 2020

Jordan Eliseo, Senior Investment Manager from Perth Mint (ASX:PMGOLD) walks us through the its success story. How is it possible for Perth Mint to be the best performing ETF year-on-year? What lies ahead for the gold price, and what are the fundamental tenets of gold’s performance vs. equities?

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Jessica: Hello I’m Jessica Amir a market analyst with a Bell Direct.

Well the diversification message is one that’s resonating with investors given the Aussies share market has lost 20% this year while the gold price has gained 13%, with many of the ETFs that track the gold price shining.

So today, to talk us through the case for investing in gold via ETFs is Jordan Eliseo from Perth Mint.

Hi Jordan, thanks for your company.

Jordan: Thanks for inviting me on.

Jessica: First-up, PMGold is the best performing ETF year-on-year across the entire landscape and that’s according to Bell Directs ETF filter.

It’s also the second largest gold ETF on the ASX and by far the cheapest, so Jordan tell us about your success and how you’ve managed to also outperform your peers.

Jordan: Thanks Jessica, so the performance of PMGold is driven by two factors, it’s a passive exposure to the Australian dollar gold price, so you mentioned before the US dollar gold price up around 13% this year, we’ve also seen the Australian dollar fall the better part of 10% down towards 60 cents and so those two factors combined have seen the price of PMgold rally by by over 20% and that’s why we’ve performed as well as we have and investors are obviously very happy with that exposure.

Jessica: So Jordan, why do you think investors should be holding or investing in gold as an asset class?

Jordan: I think there are a few key drivers of the investment demand for gold.

First is that the long-term returns of around 8% per annum are very strong, more importantly Gold tends to really thrive in environments of higher uncertainty and equity market volatility like we’ve seen in Q1 of this year.

So it is only natural that investors that want to hedge against equity market risk will incorporate assets like gold into their portfolio.

Jessica: So what fuels demand for gold and what’s been pushing the commodity higher?

Jordan: So right now we’re seeing three key areas of demand play out influence the price.

The first is actually inflows into ETFs themselves so they’re pretty much running at record highs. 2019 was a great year, this year is track to be even better, we’re also seeing record levels of central bank demand.

The central banks are obviously major players in the gold space and right now in 2020 we’re also seeing a very sharp pickup in retail demand for gold bars and gold coins.

So those three factors combined are driving gold demand and of course that is helping fuel fuel prices you know up towards over $1,700 U.S and $2,700 Australian dollars an ounce right now.

Jessica: So Jordan, where do you think the gold price might sit by the end of 2020?

Jordan: We’re not in the business of giving gold price forcast, but I think probably the most important thing for investors to look at is the history of gold’s performance in environments where real interest rates are low or indeed negative like they are today and if you go back over the last  50 years in Australia in any year where the real rate of interest was 2% or lower the average return on gold has been around 20% per annum.

So again we can’t give a forecast on where the price will be by the end of the year, but that’s one factor for investors to keep in mind.

Jessica: And gold has this real inverse relationship with equities, doesn’t it?

Jordan: It does and the really interesting thing there is gold display what I call diversification that matters.

So in environments where equities rise historically gold rises as well, it just doesn’t rise by as much.

But as we’ve seen in Q1 of this year and indeed across the entirety over the last 50 years, whenever equities sell off, gold becomes negatively correlated to equities, so it tends to rise and you get that nice balancing act at the portfolio level.

So as I say that’s been probably the main driver of gold demand in this quarter, has been that sort of portfolio edge angle to that to the gold story.

Jessica: Now just lastly Jordan, some investment managers believe gold doesn’t have a place in a well diversified investment portfolio over the long term.

What are your thoughts on that?

Jordan: Obviously I respectfully disagree.

You know gold has a number of important attributes that it can play or that it adds to a portfolio.

So as I said it’s obviously uncorrelated to equities when equities are selling off, its delivered strong returns in its own right over the long run, it’s also incredibly liquid and low-cost which are positive attributes for an investment.

And the reality is that gold has the longest lasting track record as a wealth protecting asset that investors can turn to.

So when you consider the environment we’re in when where yields are risked in the economy etc., I think a portfolio is well served by having some allocations of precious metals in it.

Jessica: Jordan Eliseo from Perth Mint, thanks so much for your time.

Jordan: My pleasure, thank you Jessica anytime.

Jessica: And for investors wanting to find out more about PMGold or the other gold ETFs head to Bell Direct’s website.

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