Cheapest Tracker of the Price of gold

aroominyork

The way I see it is that if I invest c.£2450 today I will own an ounce of gold. Gold is priced in USD so that £2450 is based on today’s forex conversion of $3218. If the price of gold rises 10% while the dollar depreciates by 10% against Sterling – which could happen if the dollar loses its safe haven status, leaving that field open to gold – then if I sell my ounce I will get back £2450. However if I have hedged I will receive the 10% increase in value.

PS. The OP wants to "track(s) the actual price". Since gold is priced in USD, surely you can only do that by hedging the currency unless you are buying a USD-denominated ETF.

masonic

Yes, if USD depreciates in value, not only will the gold price rise in USD to $3575, your hedged ETF will rise in GBP value because of the hedge - to £2722, so you'll own more than an ounce of gold worth of the ETF after the depreciation. It is like currency speculating using gold as collateral. However, if the exchange rate moves in the other direction, you'd lose out on the bet.

In the unhedged version, even though gold has risen to $3575, that is still equivalent to £2450 at the new exchange rate and you still have your ounce. You'll still have your ounce regardless of what happens in the currency market.

aroominyork

I'd say it's likely a weaker dollar would see the price of gold rise, but that's not nailed on.

But it's an interesting point of whether hedged or unhedged represents currency speculation if what you want to do is invest in the underlying commodity without your returns being affected by forex movements.

masonic

Indeed, gold is currently overvalued in my estimation, so it could itself devalue (i.e. equally against currencies) and overwhelm any currency movements. Or perhaps it will be driven up independently of currency movements by the next utterance of the oompa-loompa of vengeance. If you just want to capture that (maintaining constant exposure to gold), you would not hedge.

aroominyork

The gain or loss when you sell will not reflect the change in price of gold unless the USD/GBP rate is unchanged. My thesis (because naturally I will publish this) is that is not “maintaining constant exposure to gold”; it is being exposed both to gold and to the currency market. I have never owned gold, but in the current environment where a flight to gold might be precipitated by a flight away from the dollar, hedging seems appropriate.

Edit:  I start (only start…) to see the other view. There could be two factors driving gold higher; i) increased demand, and ii) to reflect a weakening dollar… and you should only be betting on the former and avoid being affected by the latter? Is that your point?

masonic

aroominyork said:

The gain or loss when you sell will not reflect the change in price of gold unless the USD/GBP rate is unchanged. My thesis (because naturally I will publish this) is that is not “maintaining constant exposure to gold”; it is being exposed both to gold and to the currency market. I have never owned gold, but in the current environment where a flight to gold might be precipitated by a flight away from the dollar, hedging seems appropriate.

Edit:  I start (only start…) to see the other view. There could be two factors driving gold higher; i) increased demand, and ii) to reflect a weakening dollar… and you should only be betting on the former and avoid being affected by the latter? Is that your point?

Let's see if I can improve your vision with a rather extreme hypothetical example...

We'll start with an exchange rate this is parity for simplicity, so £1 = $1. Let's use the current GBP price of an oz of gold, namely £2,500. Which will then equal $2,500.

Consider a total loss of confidence in the dollar, prompted by massive selling of international Treasuries holdings and continued perseverance with tariffs. The gold price soars in GBP to £5k, but this coincides with hyperinflation in the US and the collapse of the dollar, making the gold price $50k. Now £1 can be exchanged for approx. $10.

This is a day that aroominyork celebrates, because that hedged ETF goes up in value 20x instead of 2x for the unhedged version. The ounce of gold equivalent originally purchased digitally can now be sold and reinvested in 10 oz worth of the actual metal, with the fund now valued at £50k, which could be converted on that day to $500k.

Meanwhile, masonic checks his trading account to find his unhedged holding valued at £5k or $50k, matching the new gold price. What else would be expected? At the end of the day, gold generates no income, so 1 oz gold will not be worth more than 1 oz of gold in the future. Same as if it was bought in coin form and buried in the garden.

It's not really about what one should or should not be doing. Hedging is a valid strategy, but it is a strategy that seeks to outperform the actual asset by layering on some currency speculation. A couple of years ago I held a hedged S&P500 tracker for a period of time and gained from the pound strengthening from a 30+ year low. It can be valid in the scenario where you are buying fixed interest securities and you want certainty in the value of your income stream. If you receive dollar coupons, then exchange rate movements could change their value in GBP, whereas hedging will lock in a specific GBP value. Whereas, you already get the same income stream from gold in any currency, namely zero.

aroominyork

OK, I get that – at least I think I do... You are surmising, or at least hoping, gold’s price will respond reasonably smoothly to forex fluctuations and inflation. You want to be exposed only to the demand-driven aspect of the gold price. So if there is a flight to gold and a flight away from the dollar, you only want to be exposed to the former. You see hedging as essentially leveraging the transaction. Is that correct?

masonic

aroominyork said:

OK, I get that – at least I think I do... You are surmising, or at least hoping, gold’s price will respond reasonably smoothly to forex fluctuations and inflation. You want to be exposed only to the demand-driven aspect of the gold price. So if there is a flight to gold and a flight away from the dollar, you only want to be exposed to the former. You see hedging as essentially leveraging the transaction. Is that correct?

It's a little simpler than that. I am just looking for electronic exposure equivalent to buying some number of sovereigns from a dealer and holding them securely myself. If I were to do that, and I wished also to profit from some flight away from the dollar, I'd need to buy that gold and also take out a separate spread bet or CFD, seeking to profit from the movement in USD:GBP. If I were inclined to do both of these things, then I might be tempted to combine them into a single security, namely the hedged ETF. But if I just wanted simple exposure to gold, I would not.

Unlike when the pound fell to that historic low of ~$1.05 in late 2022, when I had quite high conviction that was overblown, I could not even give you an educated guess about where the exchange rate is likely to go from here. But what I can tell you is that there won't be some kind of significant arbitrage, where gold could be bought in one currency and sold in another for profit, so the ratio between the gold price in USD vs GBP is likely to respond pretty well in line with the exchange rate fluctuations between USD and GBP.

TheGreenFrog

I understand that you can buy gold coins from Royal Mint and have them stored by them - this removes the many issues involved in taking possession of physical gold.  But I am not sure of the point of it so have not investigated myself.  When I have invested in gold I have done so via physical gold ETFs as referred to in other posts.  

TheGreenFrog

masonic said:
But what I can tell you is that there won't be some kind of significant arbitrage, where gold could be bought in one currency and sold in another for profit, so the ratio between the gold price in USD vs GBP is likely to respond pretty well in line with the exchange rate fluctuations between USD and GBP.

Agree - and I would go further and say that the prices of the USD and GBP versions respond to all practical purposes exactly in line with the underlying FX rate.

There is no "hedged" gold ETF.  Gold is in effect a currency and when you invest in a currency you don't then hedge that exposure as it would defeat the point of investing in the currency.  There are gold ETFs denominated in different currencies - but that is not the same as hedging.  All things being equal it is better to go for the ETF denominated in whatever currency you have available to invest - so that will be GBP for me.  Also simpler if you are investing outside a tax wrapper so you don't have to factor in FX rates when you calculate your CGT.