Gold is often overlooked, but is one of the most classic forms of protection against inflation and volatility. Here’s why I think the Global X Physical Gold ETF (ASX: GOLD) is worth a look.
Investing in gold
Gold has long been used as a “defensive” asset in investment portfolios. Defensive doesn’t mean it’s not risky, it normally just refers to the fact that it behaves differently to shares.
With a low (or even negative) correlation to most other asset classes, gold will normally do well when the share market or property market are doing poorly.
The reputation of gold as this “safe-haven” has probably increased the effect over the years. Because it’s such a well-known play, investors who get spooked by a volatile share market will often turn to gold, pushing the price up and reinforcing its reputation.
What a lot of investors like about gold is that it’s a physical asset that you can see and hold. The problem is, it’s a bit inconvenient to be storing gold bars under your bed.
That’s where an exchange traded fund (or ETF) comes in.
Global X Gold ETF
The Global X Physical Gold ETF (ASX: GOLD) solves this issue of the inconvenience of holding physical gold.
Rather than holding it yourself, you can buy a unit of the GOLD ETF which gives you an entitlement to physical gold held in a JP Morgan vault in London.
This is a pretty important point.
Some other gold ETFs will give you what’s called a synthetic exposure. This means the units that you buy are designed to mimic the movements in the price of gold, but the ETF issuer doesn’t actually own any gold.
With the GOLD ETF, if you’re a unit holder, you can actually send a form off to Global X and receive your physical gold if you wanted to. Now, you probably wouldn’t because it’s expensive, but that’s not really the point.
The point is that your investment in the GOLD ETF is directly tied to a physical asset. I think that’s a big tick for any sort of defensive investment.
So, how’s it perform?
The GOLD ETF has been around since 2003 and has returned ~8.75% per year after fees.
Importantly, some of the best performance came around the end of 2008 (the Global Financial Crisis) and early 2020 when COVID hit.
Over the long term gold has held up as a useful asset that can provide protection during a down turn while also delivering greater capital growth than you would normally get from something like bonds.
The GOLD ETF charges a 0.4% annual management fee, which is a bit more expensive than some other gold ETFs but worth paying to get the backing of physical gold in a vault rather than a synthetic exposure.
If you’re looking for a defensive asset but not concerned about generating income, I think the GOLD ETF could be a sensible choice.
