Bullion and Gold ETFs in 2018

  • 08 January 2018

Gold underperformed last year, but it may rise back up again. Getting the exposure to the bullion through gold ETFs is easy and simple. Currently, the South African ETF market capitalisation is about R80 billion and is expected to increase because of the market’s growing popularity. A lot of investors are shifting from active investments to the more passive ETFs because they offer cost-effective and automated strategies. Consequently, local ETF providers are also planning to widen their reach and increase their services. Soon, ETFs’ benefits will attract even more local investors, leading to strong investment inflows in 2018.

Before moving forward, however, FXCM reminds interested traders to be wary when it comes to trading gold ETFs on a short-term basis because it’s already difficult to manage them long-term. Investing in gold ETFs is almost tantamount to investing in the precious metal but through various different mediums, like industry specific stocks, derivatives products, physical bullion, and currencies. And similar to its relationship with the US dollar, gold prices are stronger when the South African rand is weaker. This then begs the question as to how the gold ETF is projected to be a force to be reckoned with this year.

Seeking Alpha emphasised that a driving force is its positive correlation with gold prices, and because they are predicted to go up, so will the price of ETFs. Traditionally, investors have long used the momentum strategy when dealing with the precious metal. The momentum strategy is basically following the continuation of an asset’s trends. Considering gold prices have been steady since the start of 2018, there seems to be no reason for investors to change strategies when investing in the precious metal and its ETFs.

Others have attributed the new demand to gold’s recent strength against geopolitical events as well. For instance, US Global Investors CEO Frank Holmes recounted how South African president Jacob Zuma’s leadership led to political turmoil for the country, taking a huge toll on the economy. His policies were met with various protests and even resignations from several members of the nation’s parliament. Around that time, the South African rand dropped significantly, downgrading the country to “junk” status. In contrast, gold prices rose up at the same time, with gold companies like Sibanye Gold and Harmony Gold seeing substantial economic activity daily.

While 2018 looks to be another year of political uncertainty year, the demand for gold ETFs might rise. For a lot of investors, they see these funds as a distanced view of what used to be a safe haven investment. It is left to be seen whether gold will still come out on top against political turmoil as it did in 2017. Additionally, gold also has a lot more competitors, particularly the rising cryptocurrencies, and some investors have become more cautious with regards to investing in the precious metal. At least with the gold ETF, they are exposed to its economic activity without other complications of investing in the bullion.

The ETF markets will remain a huge talking point for South Africa’s finance sector this 2018. And among its variations, the gold kind has the potential to generate further engagement.