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32 finweek 19 March 2020 http://www.fin24.com/finweekGOLD ETFs
a
fter a record-long bull run in US equity markets, global
economic growth is expected to slow significantly in- An increasing number of black swan events, rising
geopolitical tensions and trade uncertainty continue to find
prevalence in the global marketplace.
With the future scope of uncertainty unlikely to abate anytime soon,
the need to allocate a larger portion of an investment portfolio into
safe-haven assets appears more necessary at present.
Gold
Gold can offer investors a store of wealth or type of
insurance against an inclement economic climate.
The current economic climate continues to carry an
increased amount of uncertainty, with the growth
outlook having deteriorated significantly this year and
geopolitical tensions waiting to re-emerge.Coronavirus and economic growth
As the US-China trade war found some resolve at the
beginning of the year, the coronavirus emerged to take hold of the
baton of disruption in the global marketplace. The outbreak in China
has seen quarantine zones seriously disrupting supply chains and
manufacturing within the region. Expectations are now that first-
quarter growth within China could be as low as
0% to 1%. As a base of comparison, GDP growth
between 1992 and 2019 averaged 9.1% per year in
China, with the fourth quarter of 2019 growth in
the region of 6% being a 29-year low.
China is the world’s second-largest economy
and contributes meaningfully to global economic
growth (roughly 30% thereof). A slowdown
in China has a knock-on effect on the global
marketplace. Commodity-driven economies
(such as South Africa) rely on exports to the
region. China also serves as a primary production
hub for an incredibly large number of the world’s largest companies.
Some companies that have already warned of the coronavirus
impact on their respective businesses include: Microsoft, Apple,
Mastercard, Starbucks, McDonald’s, Coca-Cola, Nike, Domino’s Pizza,
Estée Lauder, Expedia, HP, Walt Disney, Walmart, Visa, TripAdvisor and
Procter & Gamble.
But while China has managed to contain the virus, the epidemic has
moved towards pandemic status, with the outbreak growing in the rest
of the world. Italy now has the highest number of fatalities outside of
China with a growing number of infections being reported in France,
Germany and Spain too. The combined euro area makes up a larger
economy than the US, and the virus is starting to impact local business,
travel and tourism. The eurozone is already battling fragile economic
growth, with the unknown effects of Brexit also yet to play out.
There is no cure or vaccine available for the coronavirus yet. WhileBullion’s safe-haven status
considered amid market fears
It may be worth protecting your investment portfolio through buying gold ETFs, writes Shaun Murison.
viruses are very rarely cured, they are managed. A vaccine would be
a preventative measure, but the closest assumed development date
for a working vaccine might only be by the end of the year. Once
developed, the vaccine would still need to be mass manufactured
and distributed.
The number of coronavirus infections continues to increase as
we await a remedy. This creates an indeterminant timeline as to
how much more the business environment will deteriorate
and how long it will take for global business to return
to normal, let alone realise meaningful growth. The
uncertain timeline and increasing disruption are
negative for equity markets and motivate towards
gold as a store of value investment.Geopolitical tensions remain
The beginning of the year reminded us of how quickly
geopolitical risks can flare up after a US airstrike killed
Iran’s top military general to threaten a new war in the
Middle East. Major Shia-led countries such as Iran, Iraq and
Syria continue to have fractured relationships with the US and its
imposed policies or sanctions.
While the US and China have reached a minor accord, trade
negotiations are far from being completed. The EU, China and the US
will continue heated trade discussions in 2020.Investing in gold
Gold, a traditional safe-haven asset, generally moves
inversely to equity markets when fear and uncertainty
are elevated. The central banks of Australia, Canada
and the US have recently taken aggressive steps
to accommodate markets, lowering interest rates
unexpectedly and more than expected.
Investors looking to protect themselves against this
fear and uncertainty in the marketplace may look to
gold exchange-traded funds (ETFs) to gain exposure.
In South Africa the Newgold ETF tracks the rand price of gold
(100th of a troy ounce). This investment would provide some
sensitivity to the rand, benefitting from its weakness while being
inhibited by its strength. Investors preferring not to have the local
currency risk in their gold exposure might prefer to look at the
SPDR Gold Trust.
While a rising gold price would benefit gold mining companies,
these companies incur the inherent risks of mining the commodity
(including safety and labour). Gold ETFs provide exposure to the
commodity, backed by the physical bullion, without carrying the risk
associated with these mining companies. Investors looking for some
safe-haven protection in their portfolios could consider these ETFs
as viable options. ■
[email protected]
Pho Shaun Murison is a senior market analyst at IG Markets.
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By Shaun MurisonThe combined euro area
makes up a larger economy
than the US, and the virus
is starting to impact local
business, travel and tourism.