How to Buy Gold on the ASX with ETFs

Gold is perhaps the oldest investment known to man. In ancient times, it enchanted pharaohs and moved kingdoms, and today it is recognised as a trusted store of value and steady-going portfolio staple. With gold hitting record highs multiple times over the past year, many investors are starting to add the shiny metal to their portfolio. But before going for gold, there are a few factors to consider.

Let’s X-Plain:

  • Why would you invest in gold?
  • Should you currency hedge your gold?
  • Why use an ETF to buy gold?

Why Invest in Gold?

Gold is a strategic investment for those looking to diversify and hedge their portfolios against economic instability. Unlike stocks or bonds, gold often retains or increases in value during periods of inflation or market volatility, making it a reliable store of wealth. Historically, it has a low correlation with other asset classes, meaning it can reduce portfolio risk by balancing out losses during downturns in equities or currencies.

Additionally, gold can serve as a hedge against currency devaluation, as its price tends to rise when fiat currencies weaken. It is also a good way to address geopolitical risks, as gold is considered a “safe haven” asset which professional investors gravitate towards during times of global uncertainty.

Including gold in your portfolio can provide long-term stability, act as a counterbalance to riskier investments and protect your wealth in various market conditions.

Should You Currency Hedge Your Gold?

Currency hedging is the act of removing the effect of foreign exchange on your investment’s returns. Gold is typically priced in US dollars around the world, thus when you invest in unhedged gold, your returns are affected by the fluctuations in the US dollar (USD) to Australian dollar (AUD) exchange rate.

So, should you invest in currency-hedged gold or unhedged gold? There are pros and cons to both:

Pros of Currency Hedging

Hedging your gold can protect against fluctuations in the US dollar. This is particularly useful especially if you expect the US dollar to weaken (or AUD to strengthen) and negatively affect your returns. By hedging, you eliminate this currency risk, ensuring that the value of your investment is solely tied to gold’s performance, not currency swings. This can offer more predictable returns, particularly in volatile currency environments.

Cons of Currency Hedging

Currency hedging can come with additional costs which could eat into your overall returns. There’s also the potential to miss out on favourable currency movements. For example, if you hold gold in a strengthening currency, hedging will prevent you from benefiting from that rise. Historically, the USD has appreciated against the AUD, making unhedged gold the better long-term investment. Additionally, unhedged gold can provide better diversification as fluctuations in the USD can provide an additional layer of differentiation from traditional assets.

Why Use an ETF to Invest in Gold?

Investing in gold through exchange-traded funds (ETFs) provides a convenient and accessible way to gain exposure to gold without the need to purchase and store physical bullion. Not only is this more secure, as your gold will be stored in some of the most protected vaults in the world – you can easily trade shares of gold ETFs on major stock exchanges, which offers greater liquidity compared to physical gold bars. Additionally, gold ETFs tend to have lower running costs compared to managing physical gold as there are no storage or insurance fees involved.

Investors who wish to currency hedge their exposure can also rely on ETF issuers to provide professional portfolio management and avoid the hassle of personally attending to complex derivative strategies.

For investors who want to add gold to their portfolio in a cost-effective, liquid, and simple manner, gold ETFs offer a practical and compelling solution.

Related Funds

GOLD:  Global X Physical Gold (ASX: GOLD) invests in physical gold via the stock exchange, offering higher liquidity and removing the need for investors to personally store bullion.

GXLD:  The Global X Gold Bullion ETF (ASX: GXLD) invests in physical gold via the stock exchange at a low management fee for long-term investment.