While the S&P 500 has lost 7.77% of its value since the beginning of the year, gold, currently at the $1,835 level, has gained 1.59% as shown in the blue chart below. This contrasts starkly with its one-year loss of 1.87% and has given new impetus to gold bulls whose primary argument is that the yellow metal is a hedge against inflation. Investigating further, another cause for the precious metal’s surge appears to be the U.S. 10 Year Treasury yields as seen by the orange chart below rising by 10.1% since the beginning of January 2022.
Source: Trading View
Moreover, gold remains a low-yielding asset, and those who have bought and held it for the last year at the first sign of the consumer price index rising, know that its role as an inflation hedge is questionable.
The role of gold during the current high inflation period
To make my point, only three months back, investment banking firm, JP Morgan Chase (JPM), was talking about Bitcoin being viewed by investors as a better hedge against inflation than gold. With the cryptocurrency world in disarray, one would think that they are having a change in approach towards the yellow metal.
Well, while inflation is generally supportive of gold prices, inflation-adjusted gold prices are already high, after having gained more than 19% since the March 2020 market crash. Then, even if inflation persists for a while, it may not impact gold prices by much. Thus, while current levels may persist for a few months, the price of gold could fall to around $1,750 per ounce in the second quarter of 2022 or in Q3 at most, as the Fed makes the fight against high inflation a priority through raising of interest rates.
On the other hand, for investors doubting the ability of the Fed to address inflationary pressures during 2022, especially after talks about transitory inflation were proved to be unfounded, I favor a mix of precious metals, including gold.
There are basically two reasons for this.
First, as seen in the chart below, the iShares Gold Trust ETF (IAU) has delivered a one-month (from December 23 to date) gain of only 1.49% compared to 6.07% for the iShares Silver Trust (SLV) and even a higher 6.32% for the Aberdeen Standard Physical Platinum Shares ETF (PPLT). As for the Aberdeen Standard Physical Palladium Shares ETF (PALL), it has delivered a whopping 11.35% upside.
Now, silver, platinum, and palladium have all produced much better performances than gold for the last month. The reason for this is, unlike gold, silver, platinum, and palladium are also used as industrial metals, and this, in addition to their roles as stores of value.
For these same reasons, there are more price fluctuations in the silver, platinum, and palladium markets, which are by far, more volatile than gold. This is evident by both SLV and PPLT delivering one-year losses of 5.41% and 7.13% respectively, whereas it has been a painful -11.16% downside for palladium. By comparison, it was a slide of just 1.87% for gold.
Thus, I favor the Aberdeen Standard Physical Precious Metals Basket Shares ETF (GLTR) which has delivered a mid-way one-month performance of 4.12%.
Better opt for precious metals ETF like GLTR
There are advantages in opting for this ETF for current market conditions where we are amid an economic recovery, but some uncertainties are likely to emerge as the U.S. Federal Reserve tightens monetary policy. In this case, GLTR provides investors with the growth capability of silver, platinum, and palladium, with the added steadiness of gold.
Scanning the industry for alternatives, in addition to GLTR, there is the Invesco DB Precious Metals Fund (DBP), but it has underperformed GLTR for the past month, delivering a gain of only 2.28%.
As for GLTR, it is issued by Aberdeen Standard Precious Metals Basket ETF Trust. Its investment objective is to reflect the performance of the price of a basket of gold, silver, platinum, and palladium bullions, less expense. For this purpose, Aberdeen charges management fees of 0.60%, which is less than the Invesco fund. More details are shown in the table below.
Finally, GLTR is designed for investors who want a cost effective to invest in precious metals. Moreover, the shares are physically-backed by precious metals located in vaults in London and Switzerland. Another noteworthy point is that the ETF does not use any leverage mechanism.
Chetan Woodun has a Masters in Information Management and a Post Graduate Diploma in Business Management and Industrial Administration. He is certificated in Cloud, AI, Blockchain, IoT, Equity Finance, Datacenter and Project Leadership.