Gold in Turbulent Times
Stocks typically depend on economic growth, corporate profits, and investor sentiment. They perform best when the economic outlook is positive, with robust consumption and rising earnings expectations.
Gold, conversely, is traditionally viewed as a safe-haven asset, benefiting from economic uncertainty and geopolitical instability. During periods of global trade tensions, such as U.S. trade wars with China and the European Union, gold prices tend to rise sharply. This is because investors seek to hedge against risks like currency fluctuations, stock market volatility, and declining economic sentiment.
During Trump’s first term, gold already showed upward momentum in response to trade tensions. In the opening months of Trump’s second term, gold increased by more than 10 per cent and surpassed $3,000 per ounce, a historic high, driven by fears of prolonged trade conflicts. Many analysts are revising their predictions upward, anticipating further controversial Trump policies.[1]
A significant growth factor at the moment is central bank purchasing,[2] particularly from China, Poland, India, and Turkey, as many countries seek to reduce their reliance on the U.S. dollar.
Ethical Gold
Gold mining often results in environmental degradation. Deforestation and habitat destruction are common in mining areas. Toxic chemicals like mercury and cyanide are frequently used in extraction processes, leading to water and soil contamination.
Especially smaller mining operations have faced labour concerns in the past, including child labour allegations. Tracing the origin of gold is difficult, as it is often mixed with gold from other sources later on.
One example of a solution addressing these concerns is the HANetf Royal Mint Responsibly Sourced Physical Gold ETC (RMAU). An ETC is an exchange-traded commodity, a type of security that tracks the price of a commodity, in this case, gold. The Royal Mint sources[3] gold exclusively from suppliers certified by the London Bullion Market Association (LBMA) Good Delivery accredited refiners. It also conducts both internal and third-party audits to verify compliance with these standards. In the past, gold bars from conflict-affected regions have been removed from the ETC’s holdings.
As a stand-out feature, the ETC incorporates an increasing amount of recycled gold bars. This currently amounts to 55% of the total gold held by the ETC, drastically reducing the environmental footprint.
Drawbacks and Risks
In a rising interest rate environment, gold may lose its appeal as an investment. Importantly, ETCs work differently from ETFs, as they are debt instruments backed by the issuer. If the issuer defaults, investors may lose their investment. For physically backed ETCs, gold bars are held in a vault, and investors have a claim on the gold. Some ETCs offer delivery.
ETCs charge a management fee, similarly to ETFs. The Royal Mint ETC charges 0.25% pa. There may be a tracking difference between the ETC and the underlying gold price. On the other hand, purchasing gold oneself would entail storage and insurance costs.
Conclusion
Gold is largely resilient to economic downturns and can be an ethical investment with the right oversight. ETCs are a convenient way to invest in gold, but they come with risks. Gold qualifies for geopolitical hedging.