Against a benign economic backdrop of moderate inflation, but also dramatic headlines stemming from escalating tensions in North Korea, more missteps in Trump’s administration and terror attacks in Europe – we’ve seen a collective flight to safety by investors amidst rising geopolitical risks which has chilled stock markets.
Gold has been among the top-gainers this year advancing above US $1,300 an ounce since November 2016. The precious metal has already tested the US $1,300-key resistance level three times since April.
Given the fluid nature of markets and the changing dynamics of the economic landscape, many advocate a holding level of between 5% - 10% of your portfolio to be allocated to gold, given its distinct characteristics which we will discuss below.
As a safe haven asset, gold still is and remains one of the most popular form of investments, and hedging instruments for investors. Demonstrating resilience in times of market uncertainty, we saw the price of gold hit a 2-year high in June 2016, as investor sought refuge from the ramifications of the aftershocks of Brexit which rattled markets.
The precious metal is also seen as a store of value, or an asset that provides capital preservation by having features that enables downside risk protection without the erosion of long term returns.
Modern portfolio theory suggests that adding gold into a typical portfolio consisting of stocks and bonds, has historically produced lower volatility overall and increased risk- adjusted returns. This is due to gold’s role as a portfolio diversifier, and its low correlation to other asset-classes.
The aim of diversification is to allocate your investments into diferent asset-classes that are not closely correlated to one another. Doing so, will create a well-balanced and diversified portfolio whereby the losses from one asset- class is shielded from gains by another.
Whilst, gold is not known for its ability to generate high returns, its role as a natural hedge can grant downside protection, reduce risk and prevent losses from being amplified in a portfolio especially during periods of heightened market volatility.
The demand for gold has also been well supported, where increased affl uence from emerging economies has propped demand for the commodity, particularly in China and India. Its intrinsic characteristics including its resistance towards corrosion and conductivity, also makes it a preferred material for high- specification components in the technology sector.
Should you Invest in Gold ETFs?
Next, how would one go about when investing in gold? Buying physical gold may not always be an option for some.
Instead, investors may consider gold ETFs, as it provides a low-cost and eicient entry- point for investors to gain exposure into this asset-class. Providing an investor with all the hedging attributes of gold, it also removes the hassle of incurring additional cost when storing and insuring physical gold.
Gold ETFs also provide investors with the liquidity they seek in purchasing gold, as investors are provided with an avenue to trade the ETF units similar to how you would buy/sell stocks on an exchange.
By virtue of also being traded on the open market, it also means that the prices of assets are dependent on supply and demand forces. This is unlike holding a gold account through a financial institution where price diferentials between buying and selling are dependent on the gold account provider.
The Shariah Edge
Additional Shariah compliance requirements also require the creation and redemption of units for Shariah Gold ETFs to be transacted on a spot basis, without any element of deferment in the payment or delivery of gold.
In addition, each unit is physically-backed and segregated in a secure vault on a fully allocated-basis. Whilst a conventional gold ETF would provide access to performance of gold, units owned may not necessarily be backed by physical gold i.e. (paper backed gold).
Hence, ownership in a Shariah ETF unit represents fractional beneficial interest in and ownership of physical gold bars kept securely in a vault on a pro-rata basis among unitholders.
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