Investment Ideas

Gold 2019 Outlook

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Jan 21, 2019

Gold 2019 Outlook Gold had a positive return of 9.4% in 2018 2019 is looking to experience further geopolitical instability, particularly: US/China trade tension Continued uncertainty around Brexit Gold net non-commercial long contracts have been on the rise since October 2018 Does it take a market correction to see the value in gold? 2018 wrapped up in a storm of volatility. Markets up for the first three quarters and down thereafter through to late December. Consequently, leaving investors wary of what may be on the horizon. Though we have entered a fresh year, many of these volatility drivers still exist as they remain unresolved. Looking at the geopolitical landscape, 2019 is likely to present events that will continue to affect market sentiment. Trade tensions between the US and China remain, Brexit is fast approaching the original deadline and elections are upcoming in India, the EU and Australia, with all expected to play a role in shaping the year ahead. With this continued uncertainty, defensive strategies and diversification shall continue to be on the mind of many. How did Gold weather the storm? The tail of 2018 saw gold perform as a good hedge against equities. Whilst the S&P/ASX 200 dropped 7.8% from October to December end, gold netted a 9.6% gain in this same period (Figure 1), which indicates inclusion of gold into a portfolio for the period could have reduced volatility and downside risk Examining several major indices across 2018, ETFS Physical GOLD had a positive return of 9.4% whilst all major equities were in the red (Figure 2). Gold outlook for 2019 The outlook for 2019 performance will likely be impacted by a continuation of the global themes that dictated the close of 2018. In the World Gold Council’s “Outlook 2019: Economic trends and their impact on gold”, it has outlined three important drivers of gold demand: financial market instability, the impact of rates and the dollar and structural economic reforms The political instability that has enveloped the leading economies of the US and the UK is set to continue with markets responding to ongoing turmoil. The protectionist attitude of the US has encouraged inflation, with gold used by many to hedge against this. These movements have heralded a renewed interest in gold which can be seen on multiple fronts. Net positive flows into ETFs have occurred for the previous three months, though Asian markets (including Australia) have lagged Europe and America on this front. Futures have also pointed to change in sentiment towards gold. Net non-commercial long contracts have been on the rise since October 2018, reversing the downward trend seen throughout 2017 and most of 2018 (Figure 3). The bearish view of gold suggests that performance could be constrained by a strong US dollar and rising interest rates. Addressing these points; the significant price movements of the dollar in recent weeks makes the price outlook of the dollar particularly tricky to predict. Examining the relationship between gold and interest rates, these have seen a degree of positive correlation in the past although not to a particularly significant degree. Finally, economic reform is expected to continue across China and India in 2019. As the greatest consumers of physical gold (through both investment and jewellery), economic growth in these regions will likely impact the precious metal. Further economic development and particularly the increase of wealth in India and it’s growing middle class is likely to continue to drive demand. On balance key indicators that have dictated the previous performance of gold suggest that we are likely to see a continuation in the upward trend of both investment flows and price of gold. Investors wanting to access gold may be interested in the benefits of exposure through investing in gold miners’ equities. Whilst this strategy gives the potential to receive dividends it does not offer the same exposure of a physical gold ETF such as GOLD as the price changes in gold miners can be quite different from the movement of gold price. The mining industry has recently garnered attention due to large M&A movements. Significantly Goldcorp will be acquired by Newmont Mining in a US$10bn deal. Subsequent to this announcement Newmont’s share price dropped 11% overnight. For investors who are utilising gold as an event risk hedge, other factors such as M&A activity can have unexpected effects on gold miner’s share prices. Therefore, a direct exposure to physical gold will eliminate exposure to stock specific risks.

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Why aren't you looking at Gold?

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Jan 08, 2019

GOLD 100% physically backed Highly recommended by Lonsec Recommended by Zenith Key features of Gold: Can materially reduce risk in portfolios The best-known hedge against the business cycle Outperformed cash since the 1800s Hedge against geopolitical events Global trends around Gold investment: Global Gold ETF investment flows have moved to positive for the first time since May 2018 Central banks have increased buying of gold to the highest level since the end of 2015 Gold is the world’s oldest financial asset and has been used for centuries in transactions and as a store of value. However, many Australian investors are hesitant to allocate assets to gold, with the lack of yield being a common concern. We believe investors should consider the role of gold in a portfolio, particularly with the recent volatility being experienced across the globe. Key features of gold 1. Gold can reduce the risk of a portfolio The most efficient portfolio is one that takes the least risk while making the highest return. Risk can be reduced by diversifying across and within asset classes based on low or negative correlations. Gold has low or negative correlations with traditional asset classes making it ideal as a risk reduction tool. 2. Gold has outperformed cash since the 1800s In a review of every major US asset class, Jeremy Siegel, a professor of finance at the University of Pennsylvania, found that gold provided investors with a real return of 0.5% from 1802 to 2016. He found that while gold was beaten by bonds and equities, gold outperformed cash, with cash delivering a negative real return of -1.4%. 3. Gold acts as a hedge against geopolitical events Gold has had an historical tendency to rise during times of crisis and turbulence. This means gold can provide something like an ‘event hedge’ – or the chance to reduce the impact of ‘black swan’ type events which, while relatively uncommon, can have a strongly negative impact on a portfolio. Taking the well-known example of the GFC (below) it can be seen that the difference between gold and the equity markets one year on from the credit crisis was 35% in favour of gold. Global trends of Gold investment Recent global movements have shown many investors are reallocating to gold. On this front Australia is lagging behind global trends with other regions showing a greater propensity for an allocation to gold. We have seen this increased appetite for gold emerging on multiple fronts: Gold ETF investment flows have moved to positive for three consecutive months (October-December) with 3% growth in ETF holdings in 2018 The total value of global gold backed ETF holdings in now over $100bn for the first time since 2012 Central banks have increased their buying of gold to the highest level since the end of 2015 What does gold look like in a portfolio? To demonstrate the effect of gold in a portfolio we have simulated the past performance of a series of Vanguard “LifeStrategy” funds with and without a 10% allocation to gold. Simulations were run over a 15-year period (since inception of ETFS GOLD). These funds provide an all-in-one portfolio made of globally diversified blends of equity and bonds (proportion equities & bonds indicated in charts below). In every case, the portfolio including a 10% allocation to GOLD outperforms and has lower beta and standard deviation indicating a lower risk. Based on this it’s clear gold does exactly what it’s meant to do from an investment perspective and we believe that many Australian investors are ignoring these risk reduction properties. Conclusion Gold is the oldest known store of value and has been continuously used for this function for centuries. We have demonstrated above the key features of gold that make it an appealing option for some investors. Gold’s low and negative correlations with other asset classes have seen it perform as an effective hedge in previous bear cycles and during global geopolitical events that have negatively affected other asset classes. Simulated data also demonstrates how this diversification can function in a hypothetical portfolio to reduce risk and increase returns.

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Putting the Spotlight on Defenders

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Nov 11, 2018

Key Takeaways Recent market volatility has encouraged investors to position portfolios more defensively ETF Securities has a selection of products more suited to a defensive strategy ZYUS gives a low volatility approach to the US market CORE gives exposure to the historically more stable infrastructure sector GOLD provides the best-known hedge against equity market downturn and political instability Introduction Investors have battened down the hatches over the past weeks as waves of volatility have dominated the market. Maybe the market calms down and equities resurge, but now, is clear, that late cycle volatility is here and will probably become more violent at each episode. The recent equity sell-off has heightened uncertainty, with consumer sentiment nicely described by the CNN ‘Fear and Greed Index’ that looks to characterise the primary emotion driving the market (see below). Right now, this index sits at 11, or ‘extreme fear’. Why? The consensus among investors appears to be that we’re in the ‘late stage’ of the investment cycle. Wall St’s thundering run has lasted a decade – the longest ever. And the market has become increasingly wary because of that. We have seen a very large sell-off in technology sector stocks with the Nasdaq, which is often taken as a proxy for US tech, recording its worst month since 2012. This suggests that some are losing faith in the continued performance of our recent equity stars (otherwise known as team FAANG). Adding fuel to the fire, the world has been curiously watching on as China and the US continue their game of trade policy tag. As the reverberations of any decisions by these heavyweights are felt by all, this tension is creating a difficult environment for investors. Playing Defence Though we are all familiar with the old adage ‘past performance is not an indicator of future performance’, it is sometimes helpful to look back at how previous storms have been weathered. The traditional market response to a late cycle downturn can generally be characterised by a move away from higher risk equities such as technology or emerging markets, greater focus on essential sectors such as healthcare, utilities and energy, and a general movement away from equities and into cash, short-term fixed income and commodities. As the bull market nears the close of its tenth year many are considering if now is the time to reposition portfolios towards ‘defensive’ assets. So, what are the options for investors looking to rearrange their holdings into a more defensive position? ** Gold is not considered in the risk illustration for two reasons. First, there is no counterparty risk with gold whatsoever (with cash there is still sovereign risk). Second, gold has historically had low correlations with equities, so its risk characteristics work differently. Defensive Equity Solutions America If you take a glance at global headlines, the US right now may seem a difficult market to play, with high levels of uncertainty around international policy and tariffs. However, as the world’s dominant economy, many would wish to maintain some sort of equity exposure but with a defensive tilt and an eye on capital preservation as much as growth. The ETFS S&P 500 High Yield Low Volatility ETF (ZYUS) is one option that is designed to achieve this. As suggested by the name, this ETF has a low volatility filter built into its index construction. The underlying assumption is that companies that don’t exhibit aggressive price movements are less likely to be sold down heavily in a general market sell off. Specifically, the index universe (the S&P 500) is ordered to select the 75 highest yielding stocks and then the 50 least volatile of those 75 are selected creating a high dividend paying, relatively low risk portfolio based on the trailing twelve months of price data. With reference to the chart above it is clear to see that, since the VIX jumped in October, IVV has lost approximately 10% whereas ZYUS has only lost 4%. Part of the reason for this is because ZYUS has a 16% greater exposure to utilities (historically low in volatility) whilst a 17% less to information technology (historically high in volatility) (as at 30th August 2018, source: S&P). Infrastructure Another strategy investors may consider in times of heightened volatility is increasing the allocation to sectors that have historically had greater stability. One such area known for this is infrastructure. The source of this stability can be explained by looking at the industries that fall into this sector: utilities, telecoms, industrials and transport. These industries typically have high capital costs, low elasticity of demand, long business timelines and often exist as regulated oligopolies or monopolies. Their capital-intensive nature means that they are very difficult and, in some cases, like energy distribution networks, nigh impossible to disrupt. This can mean that these sectors have lower risk (as measured by standard deviation of returns) than other sectors, such as technology or real estate. The table below illustrates the substantially lower volatility of infrastructure against these sectors.

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Trade Idea: Global Infrastructure: Designed for Retirees

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Oct 07, 2018

Key Takeaways: • Infrastructure assets are considered by many advisers as ideal for retirees • CORE gives a cost effective, diversified and international exposure to this sector • CORE has outperformed many active funds over the past year, debunking the myth that active is always best in this sector

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Trade Idea: Platinum – The night is darkest before the dawn?

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Sep 03, 2018

ETFS Trade Idea: Platinum – The night is darkest before the dawn? High level summary: Platinum, one of the rarest precious metals, could correct upwards in H2 2018 to $900 an ounce This is because the platinum supply deficit is being exacerbated by today’s low prices South African politics – most platinum is mined in South Africa – has scared away mining investment, which also threatens supply Demand for platinum in auto catalysts, the mainstay of the metal’s demand, has been increasing. How to Invest: o ETFS Physical Platinum (ETPMPT) is the only pure listed exposure to platinum in Australia o MER: 0.49% p.a In this week’s ETFS Trade idea, we look at platinum, the rarest of the precious metals, whose price has been trending downwards in recent months. We take a look at whether platinum might be oversold and how fundamentals and macro trends support a near-term price rise. We finish by looking at ways investors can gain exposure to the rare metal. Platinum – Some background Platinum is a very rare metal. It is estimated that all the platinum ever produced would only go ankle-height in an Olympic sized swimming pool. (World Platinum Investment Council, 2018) South Africa produces 73% of the world’s platinum and has the overwhelming majority of proven reserves. Within South Africa itself, two companies – Anglo American (Amplats) and Impala – produces almost half of supply. (Thomson Reuters, 2018) Platinum’s unique chemical properties make it a choice element in industry. Industrial uses include electrics, medical equipment and, most importantly, catalytic converters in diesel cars, buses and trucks. Platinum is also a popular metal in jewellery due to its resistance to warping. A weak performance in 2018 Platinum has performed poorly in 2018, with its spot price sinking from a January peak of $1,016 per ounce to $790 as of mid-August. Year-to-date, platinum has fallen 23%, while gold has fallen roughly 10%. Taking a longer-term view, platinum’s spot price seems to have peaked – like gold, with which it correlates quite closely – in 2011 at around $1,855 per ounce. An upward correction seems possible While platinum’s recent performance has disappointed, some well reputed analysts believe it’s possible for prices to hit $900 in various points of H2 2018, for the following reasons: There could be some reversion to the mean in platinum’s parity in gold: at present platinum is only tracking gold on the downside and not the upside. Trends within South Africa itself are likely to support long-term a price hike. These include heightened political risks facing miners and higher utilities costs. Diesel engine production continues to rise in absolute terms, especially given strong demand in Asia. Diesel cars are not “dead” in Europe, as is sometimes implied in the press. Today’s platinum prices in the $790s are below production costs, data suggests. This means that miners will likely cut back on production, which will widen out the already existing supply deficit. We expect that the supply deficit will grow until prices bounce back. Parity with gold likely to be restored For most of its history platinum has traded at a premium to gold (one suspects this owes to platinum being the rarer metal). Yet at present platinum trades at a 33% discount to gold. In the current cycle, platinum has only tracked gold price falls and not its upside, widening the discount. (Gupta, 2018) In our view, some mean reversion in the near term is likely due to supply and demand dynamics (detailed below) but also due to renewed investor interest in response to these dynamics. As platinum correlates with gold, it offers similar portfolio diversification benefits and upside potential. (David Hillier, 2006) For this reason, we expect investor interest to rekindle as prices recover, helping stabilise demand. South African political risk and supply cuts South African politics is likely an additional supply side pressure. Mine nationalisations have been threatened by the Economic Freedom Fighters, (Economic Freedom Fighters, 2018) South Africa’s third-largest party, which is surging in the polls. (Umraw, 2018) South Africa is a one-party state, with the African National Congress ruling since apartheid ended, making an EFF government unlikely. But, as is often the case in politics, the danger lies not so much in the minority party seizing power but in its ability to force mainstream parties to adopt part of its platform. This year, we have already seen President Ramaphosa – under pressure from the EFF – outline proposals to give greater shareholdings to black owners, which would dilute current shareholders. These proposals, thus far, have been successfully challenged by miners in South Africa’s courts. But fears of dilution and government intervention have dried mining investment and slowed production, adding another supply side pressure. (Hodgson, 2018) Outside dilution fears, South African miners have hit a wall of difficulties: community unrest and union disputes over pay; skyrocketing electricity costs; and production disruptions from maintenance and safety stoppages. (Johnson Matthey, 2018) These ongoing difficulties – while not sufficient to drive up prices – are compounding the pressures caused by low platinum prices. In response to these difficulties, the past two years has witnessed industry rationalisation. Lonmin, the third largest platinum miner, sold off much of its platinum assets to another miner. (Sanjeeban Sarkar, 2017) Impala, the second largest platinum miner, shut several platinum mines in March 2018 and has indicated it will fire 13,000 staff over 2018 and 2019. (Miller, 2018) Platinum Group Metals closed a major platinum mine mid-2017 due to it being unprofitable. (Seccombe, 2018) These shaft closures and production cuts, in our view, add to the likelihood of a sharpening platinum supply deficit, which in turn will place upward pressure on pricing. Platinum trading below production costs There is also evidence that platinum prices below $790 an ounce, as they are at present, are unsustainable as they fall below production costs. By general consensus, the all-in sustainability cost (AISC) to pull an ounce of platinum out of a South African mine is above $900 an ounce. (Thomson Reuters, 2018) A recent report from Anglo American – the world’s largest and South Africa’s most efficient platinum miner – said that its AISC was $955 an ounce in 2017. (Anglo American Platinum, 2017) Production costs in North America and Zimbabwe where platinum is also mined – albeit in significantly smaller quantities – are estimated to be similar. (Statista, 2016) Only in Russia, which is currently under strict US and EU trade sanctions, is platinum trading at below AISC. Russia produces platinum in too small a quantity to alter the world average. Historically, commodities can and have traded below their AISC or marginal costs. But a situation where platinum is trading significantly below production costs – as it appears to be at present – will incentivise supply cuts and add upward pressure on prices. Demand Diesel cars and trucks are not dead The most crucial pocket of demand for platinum comes from car catalysts in diesel engines in developed economies, especially Europe. Yet diesel cars are losing market share, thanks largely to the Volkswagen scandal of 2015. According to data from the European Automobile Manufacturers Association (ACEA), the European car industry lobby, in H1 2017 sales of gasoline powered cars in Europe overtook diesel for the first time since 2009. (ACEA, 2018) This trend has been taken by some commentators as signalling the “death of diesel”. (Topham, 2018) In our view, diesel cars will likely continue to lose market share in developed economies, but warnings of “dead” diesel seem overblown. In its GFMS Platinum Group Metals Survey 2018, the most comprehensive survey of its kind, Thomson Reuters noted that platinum use in diesel catalysts rose 7.1% in 2017 thanks to strong demand from Asia offsetting declining demand in Europe. (Thomson Reuters, 2018) While in decline in Europe, European diesel cars still have a lot of “dying” left to do. According to the same numbers from the ACEA, diesel cars still make up 45% of Western European passenger cars. And although diesel’s market share may be declining, in absolute sales terms the number of diesel cars being sold globally is increasing, suggesting the mainstay of platinum demand is well supported. ETFS Physical Platinum (ETPMPT) – One of a kind For any investors dicing up the opportunity platinum affords, ETFS Physical Platinum ETF (ETPMPT) offers a one-of-a-kind solution. ETPMPT is 100% physically backed by platinum bullion, held in HSBC’s vaults in London. Every bar of platinum meets the London Platinum and Palladium Association's rules for Good Delivery, and every bar is segregated and allocated. As ETPMPT is physically backed there is zero credit risk. And because it can be redeemed for platinum bars, any deviations from platinum’s spot price will be quickly arbitraged out. ETPMPT is the only product of its kind available in Australia and offers a uniquely secure play on platinum. How to invest in physical platinum? ETFS Physical Platinum (ETPMPT) MER: 0.49% p.a. - ETPMPT is the only physically-backed platinum tracking ETF in Australia - As ETPMPT is redeemable for physical bullion, it is anticipated to track to the platinum spot price - ETPMPT trades on the ASX just like shares, meaning it is settled and held in brokerage accounts

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