While operational gearing allows gold miners to go through periods of extreme outperformance, the gold price has been far more resilient over the period, since it has little correlation to equity markets. According to FE data, the S&P Gold Spot index has significantly outperformed all of the gold-focused funds in the IMA unit trust and OEIC universe since April 2007, and with less volatility, while only one – CF Ruffer Baker Steel Gold – has outperformed it over three years.
Performance of funds vs index over 5-yrs
Source: FE Analytics
The most effective way of gaining exposure to physical gold is through an exchange traded fund (ETF), which attempts to track the day-to-day movement of the price of bullion. ETFs attempt to achieve this by either holding the physical metal itself, or attempting to emulate the price through futures and derivatives.
These products are traded on the stock exchange and priced continually, similar to an equity. Unlike an open-ended fund, they don’t require a minimum investment.
A number of gold ETFs have been launched over the past few years, but very few have a medium-term track record to speak of. The most effective at tracking the index over a five-year period are iShares Gold Trust, ETFS Gold Bullion and Goldman Sachs Gold Exchange Traded Scheme, which have all come within 6 per cent of the S&P Gold Spot.
Performance of funds vs index over 5-yrs
Source: FE Analytics
The Goldman Sachs portfolio, which tops the table over five years, has the lowest tracking error of the three; however, its outperformance is only marginal, since it boasts a higher total expense ratio (TER) than its competitors. According to FE data, it has a TER of 1 per cent, compared with 0.4 per cent from both the iShares Gold Trust and ETFS Gold Bullion.
The Goldman Sachs Gold Exchange Traded Scheme also has the lowest tracking error over a three-year period, just pipping the Kotak Gold ETF to the post. Ritesh Jain’s portfolio was launched in July 2007, so is yet to achieve its five-year track record. Like the Goldman Sachs portfolio, it has a TER of 1 per cent.
Richard Troue, analyst at Hargreaves Lansdown, believes ETFs are a decent bet for investors that are bullish on the gold price.
"They’re relatively new and their structure puts a lot of people off, but they’re pretty easy to get exposure to, and their charges are very low," he said.
"You buy a share in an ETF rather like you buy a share in a company, so there’s no minimum investment. On the whole they’re very effective at tracking the price – particularly those that are physically backed, which tend to have a lower tracking error."