Gold has a well-earned reputation as a safe-haven asset, a hedge in case the market turns sour. Yet its right to this throne has been threatened by a new kid on the block: cryptocurrency. But are the crypto prophets jumping the gun?
Gold has long been touted for its capital preservation qualities during market downturns and times of inflation. When the market goes down, gold goes up, and when inflation increases, gold increases at a greater rate.
Nor will gold overly weigh down your portfolio when the market is going well. You won’t get the same bang for your buck that equities provide, but you’ll still get some return.
“The overall correlation between gold and equities is very minimal, but if you just look at when the equity market rises, then gold is positively correlated in those environments – it just doesn’t go up as much as equities do,” says Jordan Eliseo, manager of listed products and investment research at the Perth Mint.
Cryptocurrency, such as Bitcoin, has also been touted as an inflation hedge.
“We know that in other countries that suffer from more severe currency inflation or devaluation like Venezuela and Nigeria, people use cryptocurrencies as a store of value,” Kim Grauer, head of research at Chainalysis, told Cointelegraph in August.
However, simply being labelled as a deflationary asset doesn’t necessarily make it so. To be a true hedge, there needs to be a correlation between inflation and cryptocurrency. And at present, there isn’t.
“Right now, we can’t show a statistically significant correlation between inflation in the US and Bitcoin prices, but we know anecdotally that many people invest in Bitcoin as a hedge against inflation,” added Grauer.
Mark Bouris, executive chairman of wealth manager Yellow Brick Road, accepts crypto’s place in the investment world but stops short of treating it as a safe-haven asset. “I see cryptocurrency as just another asset class, where you can invest with a view towards making a profit,” he says.
Gold, on the other hand, has a history to back up its claim as a defensive hedge against down markets and inflation.
“Gold’s got a lot more history and a much deeper market, including governments, which stockpile gold,” says Bouris.
“Gold has been a standard against which currencies are measured.”
There are several ways investors can gain exposure to gold.
1. Purchase Gold Physically
The first is by purchasing physical gold. You can store the gold yourself or you can open a storage account at Perth Mint, which provides the only government-backed investment and storage program in the world.
2. Purchase through ETF
Another way to go is to buy an exchange-traded fund (ETF) that holds physical gold. These can be categorised as either unallocated gold funds, where the issuer holds the physical gold on your behalf or unitised allocated gold funds, which are physically backed by gold bullion that is stored by fund managers on behalf of investors.
The Perth Mint Gold ETF (ASX: PMGOLD) is an example of an unallocated gold ETF, while ETFS Physical Gold (GOLD) and BetaShares Gold Bullion – Currency Hedged (QAU) are both allocated gold ETFs.
3. Invest in Gold Stock
You can also invest in gold stocks directly. “Gold stocks aren’t just reliant on the gold price,” says Bouris. “It could be that it’s a better gold-stock because the company has better management, has more licences or is more successful at finding gold. It has more upside. And often the companies will mine other minerals, so you get some balance in there.”
If you don’t want to pick the stocks yourself, there are a couple of gold miner ETFs. Not only do you get access to the gold price, but also the free diversification that comes with owning ETFs.
VanEck Vectors Gold Miners ETF (GDX) is an unhedged fund exposure to about 50 companies involved in mining gold and silver, while BetaShares Global Gold Miners – Currency Hedged (MNRS) is a hedged fund that invests in about 50 companies engaged in gold, silver or other metal mining.
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