Gold Shining in 2023?

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The returns from gold in 2022 have varied fairly widely between currencies. Measured in sterling gold is up by around 8%.[1] For a UK investor gold certainly provided strong returns especially when compared to other asset classes. Over the same period equities have seen notable losses with the S&P 500 down by around -15% in USD YTD.[2] So gold will have been a welcome addition to the portfolios of many British investors this year.

That said much of that performance has been the result of exchange rates. Gold returned around -4% in 2022 when measured in US dollars.[3] That is perhaps surprising given the backdrop. We have faced multi-decade high inflation this year -and gold is supposed to be an inflation hedge. The outlook for the global economy is uncertain and geopolitical tensions are the worst they’ve been since the gold war -and gold is supposed to be a safe haven asset. Meanwhile stock markets have faced volatility -and gold is supposed to be a diversifier.

But looking ahead it now may be the case that a lot of the negative sentiment towards gold has passed. Many analysts now see the Federal Reserve slowing rate hikes while the dollar’s strength now seems potentially in retreat. That should provide some relief for gold prices and potentially result in a pick-up in investor demand.

That’s certainly the view of Eric Strand manager of the AuAg ESG Gold Mining ETF (ESGO). He argues “we anticipate a new all-time high for gold during 2023 and the start of a new secular bull market when the price goes over 2 100 USD per troy ounce.” He points to several sources of gold demand including central banks which “as a group continued since the great financial crisis to add more and more gold to their reserves with a new record set for Q3 2022.”

Ultimately Strand sees the monetary outlook improving noting he believes “central banks will pivot on their rate hikes and become dovish during 2023 which will ignite an explosive move for gold for years to come. We therefore believe gold will end 2023 at least 20 per cent higher.”

Look to miners?

However Strand sees gold miners as poised to outperform the price of the commodity itself perhaps by a factor of two. He argues: “Gold miners are today historically cheap relative to gold something that will revert and overshoot in the coming secular gold bull market. Gold miners have lowered their debt substantially in the last ten years as other sectors instead have taken on a lot more debt.”

The steady price increase of gold over the past few years has in Strand’s words turned gold miners into “true cash flow monsters.” At the same time companies in the sector have become much more shareholder friendly. First they are very careful with new expensive projects say Strand. Second he points out they have steadily increased their dividends in recent years. Third we have “seen record share buybacks by gold miners in the last two years. But crucially this is not being done with added debt on high valuations as in most sectors.”

Gold miners are also attractive owing to low correlation they have with major indices. Strand notes: “Gold miners have a very low correlation with the broad stock market and are becoming more interesting for larger investors looking for possible/alternative return drivers and that may result in strong capital flows which will then take equity prices higher.”

ESG gold?

Another key trend for gold in 2023 will the growing demand for ESG solutions from investors. New research shows professional investors believe gold investment vehicles which do not have strong ESG credentials will lose funds to rivals focused on responsible and sustainable sourcing over the next two years as the sector develops.

The study commissioned by HANetf in November 2022 found nearly two out of five (36%) professional investors predict a dramatic increase in transfers to gold funds with strong ESG credentials while 54% expect a slight increase in switching.

Strand notes: “Institutional money will especially drive the share prices of ESG-friendly companies and ETFs with the best sustainability credentials.”

AuAg ESG Gold Mining UCITS ETF (ESGO) is both ESG screened and equal weighted. As a result the ETF provides exposure to the 25 best-in-class miners -that is those with the most sustainable business practices.”

The Royal Mint Responsibly Sourced Physical Gold ETC (RMAU) gives investors the opportunity to access gold that aligns with their values. Royal Mint’s unique control over the bullion in their custody means that the ETC is backed in part by LBMA Good Delivery bars that are cast from 100% recycled gold which is sourced from scraps in the manufacturing process.

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