Workers discuss operations at an open pit mine at the Oyu Tolgoi copper-gold mine, jointly owned by Rio Tinto Group's Turquoise Hill Resources Ltd. unit and state-owned Erdenes Oyu Tolgoi LLC, in Khanbogd, the South Gobi desert, Mongolia, on Saturday, July 23, 2016. Mongolia exported 817,000 tons of copper concentrate in the first half of the year compared with 663,800 tons a year earlier, an increase of 23.1 percent. Photographer: Taylor Weidman/Bloomberg
Precious perspectives: A copper and gold mine in Mongolia © Bloomberg

Hedge fund founder Ray Dalio laid out in a recent 7,000-word blog post the reasons he believes a damaging “paradigm shift” could soon occur in global markets.

“I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio,” was his gloomy conclusion.

A lack of confidence in the world’s monetary system, as espoused by Mr Dalio, is just one of the reasons behind gold’s rally this year, which has pushed prices to six-year highs.

But investors looking to hold the yellow precious metal increasingly favour exchange traded commodity (ETC) funds rather than direct physical ownership as a means to exposure. High liquidity and the low relative costs of such funds make them ideal for money managers looking to reduce risk in their portfolios.

“Global equity markets are doing well but the ongoing trade war means they are not fully risk-on,” says Colin Hamilton, director of commodities research at BMO Capital Markets.

“Fund managers have more capital and gold is a natural haven; gold ETFs provide investors with safety without the worries of management or mine production that come with an equity investment.”

Exchange traded gold products have other properties that attract investors. Precious metal exchange traded products tend to be physically backed — that is, they are underpinned by bars of precious metals held in a vault, and the funds have the ability to take bullion deliveries if desired.

“For investors who view gold as a risk overlay, there is an appeal in knowing that what you are holding represents an interest in a fund whose assets include physical metal,” says Christopher Louney commodity strategist at RBC Capital Markets.

Flows into exchange traded precious metals were $9.7bn in June, the highest since 2016, with the bulk of that going into gold, according to RBC data. This brings total assets under management for commodity exchange traded products to $135bn, with more than four-fifths allocated to precious metals.

Direct exposure to the underlying metals is not a guarantee of outperformance relative to mining equities during times of market turmoil, however.

A recent analysis by Bernstein found that miners BHP, Rio Tinto and Antofagasta all outperformed the copper price over the past 10 years.

Data from the UK market, meanwhile, support what Mr Hamilton says on the risk associated with gold equities: an investment in physical gold over the past decade would have returned 52 per cent, while the FTSE All Share Gold Miners returned just 7 per cent, including dividends, in dollar terms.

Investors are not only rushing into established gold funds: providers are opening new funds in a bid to capture rising gold allocations from managers. That competition, in turn, is driving down costs for investors.

Paris-based index provider Amundi launched a physically backed gold ETC vehicle for Europe earlier this month, with a total expense ratio of 0.19 per cent. That follows a trend of falling costs among its US counterparts.

The GraniteShares Gold Trust, launched in August 2017, offers one of the lowest-cost gold funds to US investors, at just 0.175 per cent. Growing competition forced State Street to launch its Gold MiniShares Trust last year, with a charge of 0.18 per cent. That compares with its original Gold Trust — the largest gold-backed fund, launched in 2004 — with an expense ratio of 0.4 per cent.

Cheaper funds are further narrowing the gap over charges made by conventional bullion vaulting services. BullionVault, for example, charges 0.12 per cent for insurance and storage, and targets smaller investors.

That is all good news for those getting into gold, but the need for vigilance on costs remains. “There are other considerations that need to be taken into account . . . tax implications and transaction fees affect the overall expense,” says Deborah Fuhr, managing partner & founder of ETF research specialist ETFGI.

She adds: “Due to rising popularity, some commodity-linked products are being used as loss leaders to capture a proportion of new funds coming under management.”

While physically backed gold funds represent the majority of ETCs, a host of more exotic exchange traded products have emerged across a range of risk profiles.

The WisdomTree Enhanced Commodity ETF offers investors exposure to the broad basket tracked by the Bloomberg Commodity Index, but with a twist. The fund in effect attempts to outperform the index by spotting and exploiting variations between futures contracts and the spot price of various commodities, according to Nitesh Shah, research manager at WisdomTree. Since its launch in 2001, the fund has returned an average 5.6 per cent a year and handsomely outperformed the index.

Such vehicles typically attract higher fees and can give investors up to five times amplification on gains or losses.

They also illustrate that investing in gold and other commodities is far from a one-way bet.

RBC’s Mr Louney also notes that interest in these funds can ebb and flow. “Last month’s inflows offset the previous three months of net outflows across the precious metals ETP space, and represents the largest inflow in several years,” he says, but adds: “While impressive, it will be difficult to sustain such momentum.”

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