Precious Metal ETFs as a Risk Management Tool, Store of Value

December 9, 2017

New York (Dec 9)  If the economy continues to expand and the Federal Reserve remains complacent in its monetary policy, precious metals and related exchange traded funds may have a place in a well-diversified investment portfolio to hedge sudden risks.

“Against the current backdrop of stretched valuations, rising uncertainty, asset correlations, and record low volatility globally, gold demand as a risk overlay may continue to rise into 2018,” Maxwell Gold, director of investment strategy at ETF Securities, said in a research note. “In our opinion, gold’s role as a core risk management tool by providing diversification and a store of value is ever pertinent in this environment. Historically, gold has worn many hats on the risk management front including a hedge against market drawdowns, geopolitical volatility, systemic risk, inflation, and currency devaluation. Gold’s potential to serve as a dynamic, multi-faceted, and cost-effective portfolio hedge against many known and unknown risks may be a powerful tool for long term investors.”

In a bullish environment, Gold argued that high inflation along with a complacent Fed waiting on further confirmation that the recovery is ongoing and investor concerns of a disorderly Fed unwind could help lift gold to $1,445 per ounce. Comex gold futures are now trading around $1,250 per ounce.

On the other hand, Gold warned that in a bearish environment, the Fed could be more hawkish and push up rates aggressively and shrink its balance sheets at a quicker pace, which could pressure gold prices to the $1,070 per ounce level.

The gold market, though, may remain relatively stable as heavy central bank demand helps prop up prices. According to the World Gold Council, China has historically been a key buyer, but has ceased buying since October 2016. Russia, along with Turkey and Kazakhstan, have supported purchases in the mean time, driving demand up 25% year-over-year as of Q3 2017.

Silver is another precious metal that has exhibited strengthening fundamentals, including rising global manufacturing and industrial production, rising producer inflation and elevated consumer inflation, and strong investor sentiment. Furthermore, production is constricted by lower capital expenditure by miners while demand for industrial applications including solar panels grows. Meanwhile, silver remains historically cheap relative to gold and it may catch up in elevated trading conditions or increased volatility.

Investors who want to use precious metals as a hedge and even a long-term play may consider a number of physically backed metals-related ETFs as a way to diversify a traditional stock and portfolio, including ETFS Physical Swiss Gold Shares (NYSEArca: SGOL), ETFS Physical Silver Shares (NYSEArca: SIVR), ETFS Physical Platinum Shares (NYSEArca: PPLT) and ETFS Physical Palladium Shares (NYSEArca: PALL). ETF investors can also use the ETFS Physical Precious Metals Basket Shares (NYSEArca: GLTR) as a catch-all of all four precious metals.

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