Time for gold ETFs? Local and offshore

In the long list of weird things that happened in 2020, the epic gold rally seems perfectly pedestrian. Gold’s performance during periods of great uncertainty is precisely why gold bugs love the commodity. 

We’re not convinced by the intrinsic value argument, but so many others are that it creates a self-fulfilling prophecy. In times of crisis—a pandemic, say—fearful investors flock to gold. The increased demand leads to a price increase, which attracts those who fear missing out on all things, further increasing the price. During times of crisis, few investments are as exciting as gold and stubborn inflation with low growth could be just another crisis.

Unfortunately buying physical gold comes with many challenges – not least of which is storage. If you aren’t keen to keep gold under your mattress (we certainly wouldn’t advise it), but still want a touch of Wild West in your portfolio, the Absa NewGold ETF (JSE code: GLD*) or the SPDR Gold Shares ETF (NYSE code: GLD) is worth consideration.

For each ETF unit created, NewGold buys 1/100th of a fine troy ounce of gold whereas the SPDR buys 1/10th of a fine troy ounce. The physical gold is stored by the ETF issuer, leaving your mattress free to serve its intended purpose. 

Since this ETF tracks the gold price, it stands to reason its performance would reflect that of the gold price. However, with the Absa ETF the performance of the rand against the dollar will also affect the performance of this ETF, with poorer performance when the rand is stronger against the dollar and vice versa. Exposure to both the gold price and currency fluctuations makes for a bumpy ride, which means this ETF is not for everyone. 

The SPDR ETF trades in US$ on the NYSE and so tracks the gold price in sync with no currency impact as you’ve already offshored your money into US$.

Since they only invest in gold, it offers no diversification. It is therefore not available within a tax-free investment account. Your exposure to the price movement of a single commodity introduces a great degree of concentration risk, which is why this ETF should not form part of your core strategy. A speculative holding of 5% of your entire portfolio should offer enough excitement to feel like you’re actually part of something without making your portfolio seasick. 

Much as gold bugs love to dream about a return to the gold standard, gold is a single, volatile commodity. As long as you don’t expect it to be something it’s not, you might have fun with it.

The two tables below show the performance and other details of the two ETFs. Interestingly Absa listed theirs just over a week before the US one listed. Further, the JSE ETF has done much better, but that’s all thanks to a weaker Rand.