In the long list of weird things that happened in 2020, the epic gold rally seems perfectly pedestrian. Gold’s performance during periods of great uncertainty is precisely why gold bugs love the commodity.
We’re not convinced by the intrinsic value argument, but so many others are that it creates a self-fulfilling prophesy. In times of crisis—a pandemic, say—fearful investors flock to gold. The increased demand leads to a price increase, which attracts those who fear missing out above all things, further increasing the price. During times of crisis, few investments are as exciting as gold.
Unfortunately buying physical gold comes with many challenges – not least of which is storage. If you aren’t keen to keep gold under your mattress (we certainly wouldn’t advise it), but still want a touch of Wild West in your portfolio, the Absa NewGold ETF is worth consideration.
For each ETF unit created, NewGold buys 1/100th of a fine troy ounce of gold. The physical gold is stored by the ETF issuer, leaving your mattress free to serve its intended purpose. The storage costs ETF holders 0.3% of their investment every year. This is the gold equivalent of a total expense ratio and certainly cheaper than storing gold yourself.
Since this ETF tracks the gold price, it stands to reason its performance would reflect that of the gold price. However, the performance of the rand against the dollar will also affect the performance of this ETF, with poorer performance when the rand is stronger against the dollar and vice versa. Exposure to both the gold price and currency fluctuations makes for a bumpy ride, which means this ETF is not for everyone.
Since it only invests in gold, it offers no diversification. It is therefore not available within a tax-free investment account. Your exposure to the price movement of a single commodity introduces a great degree of concentration risk, which is why this ETF should not form part of your core strategy. A speculative holding of 5% of your entire portfolio should offer enough excitement to feel like you’re actually part of something without making your portfolio seasick.
While gold is meant to bring stability to a portfolio during volatile times, the price of gold fell 15% in March, when all other asset classes also fell flat. Much as gold bugs love to dream about a return to the gold standard, gold is a single, volatile commodity. As long as you don’t expect it to be something it’s not, you might have fun with it.
|ETF name||NewGold ETF|
|Issue date||1 November 2004|
|Total investment cost||0.3%|
|ETF Benchmark||Gold Spot Price|
|Tax-free savings account||No investment allowed|
|ETF major holdings||Physical gold|
|Performance 1 year||+17.3%|
|Performance 3 year||+46.2%|
|Performance 5 years||+26.8%|
|Performance 10 years||+137.2%|
|Dividend yield||No dividend|
At Just One Lap, we are big fans of passive investment using ETFs. In this weekly blog, we discuss ETFs on the local market and the factors you need to consider when choosing an ETF. If you have wondered how one ETF differs from another, this is where you can find out. We explain which index each ETF tracks, what type of portfolio could benefit from holding each ETF, and how the costs will affect your bottom line.