Alternative Assets: BUY GOLD (GOLD, QAU), SELL Winton Global Alpha

We are pleased to introduce an allocation to Gold as part of our preferred alternative asset portfolio.

Gold has begun to attract investor attention in the wake of unprecedented money printing by global central banks in response to subdued economic growth post-GFC and again more recently in the aftermath of the COVID-19 outbreak.

The major attraction of gold is its scarcity.

You could fit all the gold ever mined in a cube the size of a tennis court.

Since gold generates no internal rate of return unlike financial assets, it is an entirely speculative asset.

In fact, like most commodities there is a cost to owning gold in terms of storage and insurance.

But in a world where governments and their central banking bodies are continuing to rapidly inflate the money supply, this rarity is a major support for gold prices.

Since the GFC, governments have chosen to address the massive economic capacity overhang by way of aggressive monetary easing, cutting interest rates to zero and injecting liquidity into global bond markets.

Real interest rates, which adjust for inflation have collapsed to be significantly negative.

This debasement of fiat currency has led to the revaluation of scarce assets such as physical gold.

In 2020 YTD gold has risen +15% and slightly more in Australian Dollar terms.

Following the outbreak of COVID-19, the money printing presses have gone into overdrive and the United States has seen its money supply rise by a staggering +23% annually to the end of May.

This rate of growth is more than double the monetary stimulus offered up by the US Federal Reserve in the wake of the 2008 financial crisis.

But its not just the US Federal Reserve.

The European Central Bank has inflated money supply by +8.4%, China by +11%, the Bank of Japan by +5% and even the RBA has helped stimulate +7.5% annual growth.

We believe that as fiat money continues to be debased as a means to stimulating global economic activity, the finite supply of gold will ensure its price continues to rise in the medium term.

We also believe that gold will provide portfolios with attractive diversification as it is largely uncorrelated to traditional financial assets and the economic cycle.

How to gain exposure to gold?

For Australian investors, we think the best and most practical means to own gold is through a liquid Exchange Traded Fund (ETF) that physically purchases gold on behalf of unit-holders and whose price tightly matches that of the physical commodity.

The largest and most well-known gold ETF in Australia is the ETFS Metal Securities Physical Gold ETF (ASX code GOLD) which tracks the price per ounce of gold.

The GOLD ETF was first listed on the ASX in 2003 and is the largest and most liquid means to play the spot gold price, with total assets of A$1.75bn and daily liquidity of $10m.

Each unit of GOLD is worth 0.9389 fine troy ounces of gold as at 1st January 2020.

The ETF charges 0.40% management fee and is physically backed by allocated gold bullion held in accounts by JP Morgan as custodian.

Further details for GOLD can be foundhere.

Since gold is priced in US Dollars, implicit in buying the GOLD ETF is an exposure to the Australian Dollar.

Should investors wish to remove this implicit currency exposure, a further ASX-listed ETF is the Betashares Gold Bullion ETF – currency hedged (QAU).

This ETF is less liquid, trading only $1m in turnover per day and has assets of $250m currently.

It has been slightly less successful in matching the underlying Australian Dollar gold price in recent years but does provide a credible exposure for investors keen to remove the currency risk.

Management costs for this ETF are 0.59% and like GOLD, QAU is also backed by physical gold held by custodian bank JP Morgan.

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How to fund it?

In order to prioritise Gold within the alternative asset portfolio, we have chosen to recommend exiting holdings in the Winton Global Alpha (MAQ0482AU) fund.

The Winton Global Alpha fund has been a key part of the portfolio for 5+ years for reasons of diversification.

Like gold, Winton’s managed futures strategy is uncorrelated with financial market indices.

Where performance in the past 5 years has been indifferent, we were disappointed to see the fund -12% in the year to end of May in 2020, offering portfolio’s little in the way of performance as major share-markets fell.

Performance of the Winton Global Alpha fund in the 5 years until end May 2020 was -1.2% per annum leading us to lose faith in the ability of the fund to generate necessary returns.

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

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