A gold ETF as GBP/USD hedge?

Barry_Bear

Question about hedging against GBP appreciating (not saying it will, lots of reasons it may not, so talking about a small hedge against the small possibility).
A portfolio in global equities has benefited from weakening GBP. Ignoring any gold price change could you expect iShares Physical Gold ETC (GBP) SGLN to appreciate in GBP when GBP strengthens?
Thank you.

bowlhead99

Barry_Bear said:

 Ignoring any gold price change could you expect iShares Physical Gold ETC (GBP) SGLN to appreciate in GBP when GBP strengthens?

No. The opposite.

If gold does not change in price  (i.e. "ignoring any gold price change") then an ounce of gold is no more valuable than it was the day before.

If GBP strengthens, your pound will buy more things (dollars, euros, bars of gold, units of exchange traded commodity funds, and so on) than it did the day before.

So with one pound you will be able to buy more things than you did the day before, including, more units of the fund. Which means when you go into the fund shop, the fund will have a lower price, when measured in pounds, than it did the day before. 

For example if pound strengthens from £1=$1.17 to £1=$1.50... then on day one, you could buy the whole exchange-traded gold fund for $9 billion (price label on the shelf for UK consumers says £7.7bn) but on day two, you could buy the whole fund for $9 billion (that would cost you £6bn).

When you look at the price of the gold fund in pounds, it has gone from being worth £7.7bn to being worth only £6bn. So if you bought on day one and sold it again on day two, you would have lost a lot of your pounds.

A_T

Barry_Bear said:

Question about hedging against GBP appreciating (not saying it will, lots of reasons it may not, so talking about a small hedge against the small possibility).
A portfolio in global equities has benefited from weakening GBP. Ignoring any gold price change could you expect iShares Physical Gold ETC (GBP) SGLN to appreciate in GBP when GBP strengthens?
Thank you.

The opposite would happen because gold is priced in dollars. So if the pound strengthens your gold lessens in GBP value. To counter this you can get gold ETFs hedged to sterling.

EdGasketTheSecond

If you want to play/hedge currencies, Wisdom Tree have some currency pair ETFs.

Username999

Barry_Bear said:

iShares Physical Gold ETC 

Where's the physical Gold stored?

EdGasketTheSecond

Username999 said:

Barry_Bear said:

iShares Physical Gold ETC 

Where's the physical Gold stored?

JP Morgan are the custodian

revs

Got me thinking now....I hold SGLN (iShares Physical Gold ETC) but with the pound so weak against the dollar I'm tempted to switch to GBSP (Wisdom Tree Physical Gold - GBP Daily Hedged).

I'm guessing hedging daily comes at a cost - does anyone know the impact on performance? 

I hold a global diversified portfolio containing the vanguard global index hedged - should I be hedging the Gold ETC or is this just a gamble on the currency exchange rate?

EdGasketTheSecond

You can find out the costs on the Wisdom Tree website.

Personally I don't bother with hedging; it could go either way and I don't play currencies. The major influence would be what happens to gold.  The pound nearly always go down anyway and even without Covid-19 we still have Brexit looming.

bowlhead99

revs said:

I'm guessing hedging daily comes at a cost - does anyone know the impact on performance? 

Remember there is a difference between operating cost / admin expenses etc which goes into OCF, and the actual efficiency of the hedged financial instruments which contribute directly to your gains and losses without appearing as an expense line.

You could investigate the performance drag from hedge costs or hedge imperfections by seeing what happened to the dollar price of gold over a time period to see what raw dollar performance you would get, and then looking at what was delivered as a hedged performance via the Wisdom tree vehicle where there was a big swing in GBP which would have made a GBP not-hedged investor get more pounds back because of pounds weakening (e.g. in 2016).

Did you get the same ups and downs and overall percentage change as the 'raw' dollar performance (i.e. the hedge was perfectly efficient and you got the same percentage return as a US investor)? If you got a bit more (i.e. somewhere between the raw dollar return and the GBP return), it could be because the hedge was implemented badly and you accidentally got some of the currency gain benefits.  But it could have been implemented *really* badly and you accidentally got a lot of the currency gain benefits, giving a better gross performance, but then lost out to high costs which dragged the performance down in the other direction and back towards the raw dollar return.

The only way to check it out is therefore to compare its performance in periods of sterling weakening (where a badly implemented hedge gives you a favourable result because you get some currency gains, but they are partially offset by the costs of doing the hedge) and also in periods of sterling strengthening (where a badly implemented hedge gives you an unfavourable result because you get some currency losses, and it's exacerbated by the costs of doing the hedge). 

However, the fund manager may publish somewhere (in an annual report or prospectus) some info on their success or failure of the hedges and projected tracking error rates etc.

I hold a global diversified portfolio containing the vanguard global index hedged - should I be hedging the Gold ETC or is this just a gamble on the currency exchange rate?

Presumably you're holding gold because it's a diversifier to other assets you hold, including cash. If you deliberately hedge away part of the reason that the gold price might change in pounds, you are deliberately reducing the diversification benefits it offers.

So you could say yes, it is a gamble on the currency exchange rate - you are saying you don't want some of those diversification benefits because you feel the exchange rate will move in a particular direction, and you don't want that effect.  That's the same as saying you feel the exchange rate will move in a certain direction and you would like to achieve a certain result when it does. Like saying you feel that x horse or y football team will win race A or football match B and you would like to receive a payout when it does (and accept being worse off it it doesn't).

revs

Thanks for the advice, much appreciated.
Daily swap rate on the GBSP is 0.00071% which equates to 0.26%.  If you add in the management charge at 0.39% you get a total of 0.65%.  I'll have a go at the numbers:
from 25/03/2019 to 23/03/20
gold has risen 15.60%
dollar gbp on 25/03/19 was 1.3209
dollar gbp on 23/03/20 was 1.1592
GBSP(hedged one) has risen £100.63 to £114.03 (13.40% increase)
PHGP has risen from £100.87 to £134.60 (33.73% increase)
so it looks like GBSP has underperformed gold by (15.60%-0.65%-13.40%) = 1.55%
100.87*1.3209 = 133.29 then 133.29 *1.156 = 154.08, then 154.08/1.1592 = 132.922 = 32.92%
and it looks like PHGP has overperformed gold by (32.92%-0.39%-33.73%) = 1.20%
Rounding errors and differences in exchange rates used may explain the differences.

revs

my maths could do with some work....