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ETHENEA: what is next for gold?

Munsbach, 13 August 2019 – With the price of gold currently at a six-year high, many investors are asking themselves whether it has reached its peak or if there is further upside to the precious metal. At ETHENEA, we believe that the next target for gold is around the 1,550 to 1,600 USD/oz mark. However, this target assumes that the yields on U.S. Treasuries continue to decline, that we will still see inflows in gold ETFs, and that the U.S. dollar (USD) will remain stable.

Gold is generally seen as a safe-haven asset, with a small, negative annual cost. Although gold has no coupon, SPDR Gold Shares (the largest gold ETF) have an expense ratio of 40 bps. This means that if an investor were to compare owning gold (at -40 bps) with owning 10-year Bunds (at -55 bps) then, given a stable USD view, gold is relatively attractive.

From an asset allocation perspective, prior to the recent sharp increase in price, many investors were underinvested in gold. However, once all of the pre-conditions for a gold rally were in place (such as low real yields, a stable USD, low ETF positioning, the central banks buying gold, and safe-haven investing), gold took off. The rally then encouraged other investors to start considering gold once more. Despite its recent strong performance, we would expect the gold price to stabilise or even drop if real yields increased, the USD strengthened significantly or if ETF flows were to reverse.

Although gold is a well-known safe-haven asset, there are others that are also worth considering. Historically, U.S Treasuries and the USD are viewed as safe-haven assets. Should we see an escalation in the trade- or currency war, we would expect both of these assets to perform well. In this type of scenario, we anticipate that gold, the USD and U.S. Treasuries would increase in parallel. Assuming that there is a lower limit (in terms of yield) for any safe-haven government bond, gold’s inherent asymmetry is another positive factor – theoretically, it has no upper limit.  In addition to the USD, we also view the Swiss Franc and the Japanese Yen as important safe-haven currencies.

So far this year, our gold allocation in the Ethna-AKTIV has ranged from 0% - 5%. We value gold for its diversifying properties. That is why the changes in our exposure not only reflect our expectation for the gold price; we also regularly review and adapt our gold allocation in terms of overall changes to our portfolio. This allows us to optimise our asset allocation based on our changing macro view.