Solactive: Gold – yielding after all

George Geddes

a close-up of a necklace

There are indicators pointing towards a slowing global economic growth and dovish signals from central banks with no suggestion of a turning point in the near future.

As a result, the price of gold has rallied in recent years and is likely to stay well-positioned, according to a recent white paper from German index provider Solactive.

Named Gold: Yielding after all, the report analyses how gold’s value has been influenced by the bond market’s low yields.

Solactive highlights the 10- year Bund and US-treasury yields are at -0.5% and 1.8%, respectively. Solactive’s Broad Global Developed Government Bond TR EUR index has 29.4% of its outstanding debt yielding a negative value as well as the Solactive EURO IG Corporate index having 31.8% of its debt producing a negative yield.

Negative yields have been a significant factor for gold’s positive performance since 2014, despite the volume of outstanding debt producing negative yields dipping slightly after 2016 but has recently picked up again.

Year-to-date (YTD), the price of gold has risen 13.6% with its five-year price performance only rising 10.6%.

Gold is a popular investment product for its hedging and diversification purposes as it has negative or low correlation with other actual asset classes.

But if investors wish to benefit from its price movements, buying shares of companies which makes its revenue from the gold industry, such as mining, is a potential option.

The L&G Gold Minding UCITS ETF (AUCP) has been one of the top performing ETFs in 2019, offering a year-to-date return of 47.4%. During the volatile period of Q4 in 2018, AUCP still had a positive performance with its net asset value rising 21.2% over the quarter, when most equity ETFs fell drastically.

Despite investors using gold as protection from volatility in the equity market, fixed income ETFs have seen significantly large inflows for the majority of the year and proves to be the most popular asset class.

In 2018, the demand for gold was significantly driven by jewellery and central bank purchasing. It is also a similar story so far this year with the demand for gold jewellery increasing in Q2 2019.

Gold, and even precious metals in general, are seen as havens from potential crises. Geopolitical events such as the trade war between the US and China as well as Brexit have brought huge tensions to the global equity markets.

As these events are still ongoing and are likely to continue for the remainder of 2019, gold demand is also likely to continue and therefore see its price climb. While the yellow metal does not offer a payout during the holding period, the value is worth keeping an eye on.

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