Don't fight the Fed: The case for Gold

With Central Banks' purchases of the precious metal in 2022 the highest on record, the case for Gold remains for 2023.

As a banking turmoil has unleashed across two continents, investors have been piling into gold and gold equities again. The precious metal regaining its lustre amid current market uncertainty.

Gold mining companies surged early last week as gold traded around a one-year high, bucking the trend in wider Australian markets.

Gold’s safe haven appeal is back in force, as investors flocked to the yellow metal following the Silicon Valley Bank (SVB) collapse and Credit Suisse bail out, pushing gold prices up.

Chart 1: Gold benefitting from financial instability

Source: Morningstar, Macquarie Strategy, to COB 21 March 2023

Gold prices have also been boosted from the big drop in US government bond yields and a decline in the US dollar (as measured by the DXY Index). Lower bond yields reduce the opportunity cost of holding a metal that pays no income. A weaker dollar lifts the price of commodities that are denominated in the US currency.

Chart 2: Gold prices have also been boosted by weakness in the USD (DXY)

Source: Bloomberg.

The Fed indicates that rate cuts are not in scope until 2024, contrary to what markets believe following the the SVB fallout. Our view is gold would be a beneficiary if the Federal Reserve (Fed) paused interest rate increases in response to problems in the banking system.

The World Gold Council recently said, though not without risks, a good case for gold remains in place for 2023 driven by: elevated geopolitical risk; a developed market economic slowdown; a peak in interest rates, and risks to equity valuations. In addition, continued central bank buying can’t be ruled out.

Central bank buying in 2022 was the highest on record.

Chart 3: Central bank demand for gold rose in 2022

Source: World Gold Council

It’s not just the gold price that has benefited from the current crisis in confidence.

Gold miners

Gold miners stand to benefit from the current instability as their balance sheets remain strong and they typically rise more than the gold price in an upswing. If inflation remains elevated for several years, the financial system will not be able to return to normal for an extended period. This could create a favourable environment for gold miners.

As gold equities have been underperforming the gold price over the past few years, gold equities remain historically cheap relative to the price of bullion.

Gold miners tend to outperform gold bullion when the price rises, and underperform when the gold price falls. This has been true this month, with VanEck’s Gold Miners ETF (ASX:GDF) returning 14.04% so far in March, compared to the 8.46% rise of the LBMA PM Gold Price.1 (All returns as at 20 March 2023, source LBMA, Morningstar.)

ETFs are an efficient way for investors to access gold investing.

Accessing gold through ETFs

VanEck’s global leadership in gold investing stretches more than 50 years, encompassing gold equites and bullion across ETFs and active funds.

Two ETFs for portfolio considerations:

  1. NUGG – accessing physical gold, that ‘delivers’
  2. GDX – investing in a diversified portfolio of gold mining companies

VanEck Gold Bullion ETF (ASX:NUGG)
Alternative Assets
VanEck Gold Miners ETF (ASX:GDX)
Global Shares

Below we outline the risks of each type of exposure to gold, owning gold bullion and owning gold miners:

Differences between gold miners and bullion

While each gold strategy has its merit for portfolio inclusion, you should assess all the risks and consider your investment objectives.

Unlock opportunities with VanEck

VanEck's investment strategies are designed to give you unequalled access to markets, sectors and intelligent investment ideas. Find out more.

Past performance is no guarantee of future performance. The above is not a recommendation. Please speak to your financial adviser or stock broker. For further information you can contact us via email or on +61 2 8038 3300. Key risks: An investment in NUGG or GDX carries investment risk. These risks vary depending on the fund and may include gold pricing risk, currency risk, custody risk, Australian sourced gold bullion risk, ASX trading time differences, financial markets generally, individual company management, industry sectors, country or sector concentration, political, regulatory and tax risks, fund operations and tracking an index. See the PDSs for details on risks.

2 stocks mentioned

2 funds mentioned

Arian Neiron
CEO & Managing Director, Asia Pacific

Arian founded VanEck Australia and leads VanEck's Asia Pacific business. Recognised as a thought leader and with deep experience in asset management across a range of asset classes, Arian’s passion lies in designing investment solutions and he is...

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