The Big Picture
Precious metals to spike as investors pile into safe haven assets dollar per troy ounce
1000 1250 1500 1750 2000
250 500 750
0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 yield in %, inverted
−3 −2 −1 0 1 2 3 4
Gold price
5-year Treasury Inflation Protected Securities (right axis) Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 8/14/19
With the yield curve on US treasuries inverting and more than a quarter of all global bonds now trading at negative rates, investors are running out of places to hide and turning towards pre- cious metals as the traditional haven of choice. Gold spot prices hit a six-year peak in August while futures rallied to $1,555 (£1,275) amid grow- ing investor concern about the global economy. A key driver behind the spike in demand for pre- cious metals was the Federal Reserve rate cut ear- lier that month, moving interest rates to their lowest level in a decade.
The move triggered an inversion of the US yield curve with yields for 10-year treasuries tipping below that offered by two-year paper, making it less attractive for investors to hold longer-dated debt. The rate cut has been a key factor in driving up the gold price, which during the past 10 years has shown a close correlation with US real yields. While investments in physical gold have been popular, investors are also increasingly seeking access through exchange-traded commodity funds. Yet ETC data points to an interesting turn-
around as investors increasingly appear to favour silver as an alternative to gold. By the end of July, the most popular exchange- traded product (ETP) in Europe was the ETFS Physical Silver fund, which attracted $318.3m (£261.0m) throughout the month, followed by the iShares Physical Gold ETC which booked $233.29 (£191.3m) in net new assets throughout the month and has gained more than 12% YTD. Similarly, among the most popular ETFs traded on the London Stock Exchange in August was L&G’s Gold Mining Ucits ETFs. At the same time, Synthetic Gold ETFs and gold mining stocks have historically been prone to high levels of volatility. For example, the L&G Gold Mining ETF jumped from an annual price return of -12.28% in 2015 to +82.78 the following year and -0.06% the year after that. Even physical ETPs, which have become a preference for inves- tors, have seen significant bouts of volatility dur- ing the past five years. For example, total return on the iShares Physical Gold ETC dropped below -11% in 2015.
Issue 86 | September 2019 | portfolio institutional | 15
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