To The Moon

The allure of gold has captivated investors for centuries, and in recent years, the yellow metal has seen a resurgence in popularity. As of October 2024, gold prices have reached record highs, with spot prices surpassing $2,700 per ounce. Analysts predict that gold could continue its upward trajectory, potentially reaching $3,500 by 2025. As a safe-haven asset, gold has been sought after during times of economic uncertainty and market volatility. In Australia, two prominent gold exchange-traded funds (ETFs) have emerged: GOLD.AU ( $ETFS Physical Gold(GOLD.AU)$ ) and QAU.AU ( $BETASHARES GOLD BULLION ETF(QAU.AU)$ ). This article will delve into the recent trends in the price of gold, the key differences between these two ETFs, and the potential risks associated with investing in gold.

GOLD.AU vs. QAU.AU: A Comparative Analysis

Both GOLD.AU and QAU.AU offer investors exposure to the gold market, but they differ in terms of their underlying holdings and investment strategies.

• GOLD.AU: This ETF tracks the price of gold bullion and is physically backed by gold held in a secure vault. It offers direct exposure to the gold price, making it a straightforward choice for investors seeking to invest in the metal itself. The ETF is unhedged, meaning Australian investors are exposed to fluctuations in the USD/AUD exchange rate. When the Australian dollar weakens against the US dollar, returns can be amplified, as the value of gold in AUD increases.

• QAU.AU: This ETF invests in a diversified portfolio of gold mining companies. While it provides exposure to the gold market, its performance is also influenced by factors such as the operating costs of mining companies and the overall health of the mining industry.QAU hedges against fluctuations in the AUD/USD exchange rate, providing pure exposure to the performance of gold without the additional risk (or benefit) of currency movement. This hedged structure offers more stable outcomes for Australian investors seeking returns without currency risk.

Australian investors who have already invested in gold in Australian dollars may want to consider the following factors when choosing between GOLD.AU and QAU.AU:

• Risk Tolerance: If you are comfortable with the inherent risks associated with investing in gold bullion, GOLD.AU may be the preferred choice. However, if you prefer a more diversified approach and are willing to accept the additional risks associated with investing in gold mining companies, QAU.AU could be a suitable option.

• Investment Horizon: If you have a long-term investment horizon and believe in the long-term prospects of gold, either ETF could be a viable choice. However, if you have a shorter investment horizon and are concerned about short-term price fluctuations, you may want to consider a more diversified portfolio.

The Market is Bullish on Gold – What are the Risks?

Despite the bullish outlook on gold, there are risks to be aware of:

• Interest Rate Policies: Gold tends to perform well in environments of lower real interest rates. If inflation cools or central banks, particularly the US Federal Reserve, adopt a more hawkish stance, the opportunity cost of holding gold (a non-yielding asset) could increase.

• US Dollar Strength: Gold often moves inversely to the US dollar. A stronger-than-expected dollar, driven by tightening US monetary policy or global demand for safe-haven assets, could put downward pressure on gold prices.

• Geopolitical Easing: Gold’s recent rally has been driven in part by global tensions. Should geopolitical situations improve or stabilize, the demand for gold as a hedge could decline.

• Market Sentiment: The current bullish sentiment could shift if economic conditions change faster than expected. Profit-taking and short-term volatility can always impact gold ETFs.

!!Risk Warning!!:

While the market is currently bullish on gold, history shows that when too many investors flock to a particular asset, risks are also inherent. If everyone is bullish, it can lead to overheated prices and sudden reversals when market conditions change or when expectations fail to meet reality. Gold has seen sharp corrections in the past, and while it may seem like a sure bet in uncertain times, investors should remember that no asset is entirely risk-free.

Conclusion

Both GOLD.AU and QAU.AU offer unique advantages for Australian investors looking to invest in gold. The choice between the two depends on individual investment goals and risk tolerance. While GOLD.AU provides direct exposure to gold prices in AUD, QAU.AU offers a more stable, currency-hedged investment option. Investors should carefully consider their investment objectives and the associated risks before making a decision.

@TigerWire