04 Mar 2014, State Street Global Advisors , Asia Risk
• SPDR® Gold Trust (the “Trust”) is an exchange-traded fund designed to track the price of gold (net of Trust expenses).
• Investment involves risks, in particular, investing in a single commodity asset class. Fluctuation in the price of gold may materially adversely affect the value of the Trust.
• The trading price of the shares may be different from the underlying net asset value per share.
• The Trust may not be suitable for all investors and, in the case of turbulent market situations, investors may lose part or all of their investment.
• Investors should not invest based on this document only. Investors should read the Trust’s prospectus, including the risk factors, consider the Trust’s product features, their own investment objectives, risk-tolerance level and other circumstances, and seek independent financial and professional advice as appropriate before taking any investment decision.
Following a meteoric rise over the past decade, gold fell more than 30% last year as a stabilising economy and the prospect of the US tapering its quantitative easing programme caused speculative positions to fall away.
The price correction was arguably healthy, leaving gold well-placed for investors seeking its traditional benefits, such as portfolio diversification, its potential as a tail-risk and inflation hedge.
While the unprecedented monetary policy from central banks may be coming to an end in the US, in Europe and Japan a weaker recovery is forcing policy-makers to continue printing money. In Japan, prime minister Shinzō Abe shot two arrows last year to pierce the deflationary bubble, and the third arrow of structural reform will be supported by further expansion of the money supply. All of this only serves to bolster the case for gold versus fiat currency, the value of which has been eroded by successive quantitative easing programmes.
Big demand, small supply
Long famous as a store of value, in contrast to fiat currencies, the supply of gold is limited. All of the gold ever mined amounts to just 20 square metres. If the price of gold falls and remains too low for too long, it also poses problems for gold-miners as the total manufacturing cost is now $1,200 per ounce, making it unprofitable to mine and thus leading to fewer new discoveries.
On the demand side, China recently overtook India as the biggest retail source of demand for gold. As China’s consumer-driven growth story continues, gold may continue to appeal to a growing number of affluent consumers who, so far, own just one gram per capita.
Having said all this, there are obvious downsides to gold. It doesn’t generate any income and the price can be quite volatile, but it also has no credit risk unlike, for example, many fixed-income investments.
Furthermore, gold may offer purchasing power protection. There is no perfect inflation hedge – inflation-linked bonds work at maturity but don’t hedge inflation in the interim period. In some cases, gold may be a better substitute for forward contracts to hedge emerging currency sell-offs.
Risks have not completely disappeared
Core and peripheral risks are omnipresent. European banks are still under pressure and the Chinese financial system may see a further unwind of risky products. Important elections in India and Indonesia could also lead to volatility among emerging market currencies.
In turbulent times and crisis periods, gold may prove to outperform major asset classes, as was evident during the global financial crisis. It has a low correlation with traditional financial assets. Correlation is close to zero with US equities and slightly positive with global equities.1
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Nothing contained herein constitutes investment advice and should not be relied upon as such. The value of the SPDR® Gold Shares (the “Shares”) of the SPDR® Gold Trust (the “Trust”) may fall or rise. Shares in the Trust are not obligations of, deposits in or guaranteed by World Gold Trust Services, LLC, State Street Global Advisors or any of their affiliates. The Shares are expected to reflect the gold price, therefore the price of the Shares will be as unpredictable as the gold price has historically been. Investors have no right to request the Trust’s sponsor to redeem their Shares while the Shares are listed. It is intended the holders of the Shares may only deal in their Shares through trading on the Stock Exchange of Hong Kong Limited (“SEHK”). Redemption of Shares can only be executed in substantial size through authorised participants. Listing of Shares on the SEHK does not guarantee a liquid market for Shares, and Shares may be delisted from the SEHK.
The Prospectus of the Trust may be obtained upon request from State Street Global Advisors Asia Limited and can be downloaded from the Trust’s website www.spdrgoldshares.com*. Past performance is not indicative of future performance.
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Expiry date: April 30, 2014
1 Based on 2003–2013 data from State Street Global Advisors, the correlation between gold and US equities for the overall period was 0.00 and the correlation between gold and global equities for the overall period was 0.14.