Gold and Precious Metals ETFs: an Enduring Inflation Hedge?

Since ancient times, investors have looked to gold and precious metals as a store of value and an inflation hedge. This widely shared belief has made exchange traded products (ETPs) based on gold among the largest and most popular in the commodity ETP universe.

In this article, we will explore the role of gold and precious metals ETFs as potential inflation hedges in an investment portfolio. We will discuss:

  • The unique characteristics that make gold and precious metals attractive during inflationary environments
  • Historical performance during periods of rising prices
  • Considerations for effectively incorporating these ETPs into an inflation-sensitive portfolio

Understanding the Role of Gold & Precious Metals ETFs as Inflation Hedges

Gold and precious metals – such as silver, platinum and palladium – have a longstanding reputation as safe-haven assets and stores of value. Their tangible nature and limited supply make them attractive during times of economic uncertainty and inflationary pressures.

Let’s explore the key reasons why gold and precious metals ETFs can act as effective inflation hedges.

1. Stores of Value

Historically, gold and precious metals have been favored in times of inflation and volatility. Their perceived store of value can help hedge against the effects of inflation and may protect purchasing power during periods of rising prices.

2. Hedge Against Currency Depreciation

Inflation can erode the value of fiat currencies, making gold and precious metals an appealing hedge against currency depreciation. As the value of these metals may rise with inflation, they may help preserve wealth.

3. Limited Supply & Global Demand

Gold and precious metals have limited supply, and global demand remains strong. This supply-demand dynamic can support their prices during inflationary periods.

Historical Performance of Gold & Precious Metals During Inflationary Periods

Historically, gold and precious metals have demonstrated their ability to perform well in a variety of inflationary environments. As investors seek safe-haven assets and stores of value, the demand for gold and precious metals tends to rise, driving their prices higher.

However, some observers have noted that gold may be more effective as a long-term inflation hedge; over shorter periods, the price of gold can fluctuate dramatically. During the Great Inflation of the 1970s, gold posted double-digit annual returns well ahead of inflation. However, between 1988 and 1991, gold fell in value while inflation rose to nearly 5% annually. In 2022, gold retained its value and was nearly flat as the leading stock and bond indices endured significant losses.

Gold Returns During Inflation Episodes1

28276 AXS Blog Post Gold & Precious Metals ETFs, an Enduring Inflation Hedge_ 3 (1)

 

Considerations for Effectively Incorporating Gold & Precious Metals ETPs

When considering the inclusion of gold and precious metals ETFs in an inflation-sensitive portfolio, investors should keep the following considerations in mind:

  • Diversification: While gold and precious metals can be effective inflation hedges, they can be highly volatile and should be part of a diversified portfolio. Diversification helps spread risk and enhance the overall resilience of the portfolio.
  • Allocation Size: The size of the allocation to gold and precious metals ETFs will depend on an investor’s risk tolerance and investment objectives. The allocation should align with individual financial goals and the potential impact on the overall portfolio.

Gold & Precious Metals ETFs to Consider for Inflation Hedging

Gold and precious metals ETPs offer the opportunity to own the asset without the hassles, storage expenses or high costs of buying and selling the physical asset. These ETPs can also offer a high degree of liquidity. Precious metals ETPs are typically structured as grantor trusts that hold a fixed amount of the underlying asset. Since the trust does not trade the asset, the trust itself does not generate taxable income or tax reporting.

While Gold ETPs are the largest in the marketplace, other ETPs provide exposure to silver, platinum, palladium and even exotic metals. Some speculative ETFs even offer leveraged or short exposure to these assets. Another way to gain exposure to gold and precious metals is through ETFs that invest in mining companies.

A Traditional Inflation Hedge

Gold and precious metals ETFs can serve as effective inflation hedges due to their reputation as stores of value, potential to hedge against currency depreciation, and limited supply. As integral components of an inflation-sensitive portfolio, gold and precious metals provide diversification and potential hedging during periods of rising prices. However, gold and precious metals can exhibit high volatility.

Investors should carefully assess their risk tolerance, long-term investment goals and the impact of adding gold and precious metals ETFs to their portfolios. By thoughtfully incorporating these assets, investors may be able to enhance the resilience and effectiveness of their inflation-sensitive investment strategies.

Build an Inflation-Sensitive Portfolio with ETFs

Understanding inflation and inflation-sensitive investments is a good start. Building an inflation-resilient portfolio is your next step. Fortunately, the universe of user-friendly, tax-efficient and low-cost ETFs offers a wide variety of choices for inflation-sensitive investors.

30212  AXS Schedule a Consultation Promotional Email Campaign v1-1

 

1. Henry Neville et al., “The Best Strategies for Inflationary Times,” Man Group, May 25, 2021, p. 4.

This information is educational in nature and does not constitute investment advice. These views are subject to change at any time based on market and other conditions and no forecasts can be guaranteed. These views may not be relied upon as investment advice or as an indication of any investment or trading intent. This content should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by AXS Investments or any third-party. All investing is subject to risk, including the possible loss of the money you invest.

Precious metal ETF shares trade like stocks, are subject to investment risk and will fluctuate in market value. The value of the shares relates directly to the value of the metals held by the ETF (less its expenses), and fluctuations in the price of the metal could materially and adversely affect an investment in the shares. The price received upon the sale of the shares, which trade at market price, may be more or less than the value of the metal represented by them.

As with any investment, individual risk tolerance, time horizon and long-term investment objectives should guide the allocation decisions. By thoughtfully incorporating ETFs with inflation-hedging potential, investors may be able to bolster their portfolios and position themselves to navigate inflationary environments. ETFs involve risk including possible loss of principal. Diversification is a strategy designed to manage risk. It cannot ensure a profit or protect against loss in a declining market.

IMPORTANT RISK DISCLOSURE ABOUT THE AXS ASTORIA INFLATION SENSITIVE FUND (TICKER: PPI)

ETFs involve risk including possible loss of principal. There is no assurance that the Fund will achieve its investment objective.

There is no guarantee the sectors or asset classes the advisor identifies will benefit from inflation. Fund may invest a larger portion of its assets in one or more sectors than many other funds, and thus will be more susceptible to negative events affecting those sectors.

Equity Securities Risk: Equity securities may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. Equity securities may decline significantly in price over short or extended periods of time, and such declines may occur in the equity market as a whole, or in only a particular country, company, industry or sector of the market.

Commodities Risk: Commodity prices can have significant volatility, and exposure to commodities can cause the value of the Fund’s shares to decline or fluctuate in a rapid and unpredictable manner. The values of commodities may be affected by changes in overall market movements, real or perceived inflationary trends, commodity index volatility, changes in interest rates or currency exchange rates, population growth and changing demographics, international economic, political and regulatory developments, and factors affecting a particular region, industry or commodity.

Futures Contracts Risk: The Fund expects that certain of the Underlying ETFs in which it invests will utilize futures contracts for its commodities investments. The risk of a position in a futures contract may be very large compared to the relatively low level of margin the underlying ETF is required to deposit. In many cases, a relatively small price movement in a futures contract may result in immediate and substantial loss or gain to the investor relative to the size of a required margin deposit. The prices of futures contracts may not correlate perfectly with movements in the securities or index underlying them.

TIPS Risk: Principal payments for Treasury Inflation-Protection Securities are adjusted according to changes in the Consumer Price Index (CPI). While this may provide a hedge against inflation, the returns may be relatively lower than those of other securities. Similar to other issuers, changes to the financial condition or credit rating of the U.S. government may cause the value of the Fund's exposure to U.S. Treasury obligations to decline.

Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the ETF. Brokerage commissions will reduce returns. NAVs are calculated using prices as of 4:00 PM Eastern Time. The closing price is the midpoint between the bid and ask price as of the close of exchange. Closing price returns do not represent the returns you would receive if you traded shares at other times.

Investors should carefully consider the investment objectives, risks, charges and expenses of AXS Astoria Inflation Sensitive ETF. This and other important information about the Fund is contained in the Prospectus, which can be obtained by visiting www.axsinvestments.com. The Prospectus should be read carefully before investing.

Distributed by ALPS Distributors, Inc, which is not affiliated with AXS Investments. AXI000317

John Davi

Author: John Davi

Portfolio Manager, AXS Astoria Inflation Sensitive ETF (PPI) Mr. Davi is the CEO, CIO and Founder of Astoria Portfolio Advisors, a leading investment management firm and ETF Strategist, specializing in research driven, multi-asset ETF and thematic equity portfolio construction. He is an award-winning research strategist and has over 20 years of experience as an ETF industry leader and innovator.

Featured Posts

September 1 2021
1 Min Read

Financial Literacy: More Than Just Numbers

Related posts from blog

Check out our related posts based on your search that you may like

January 10 2024
5 Min Read

By the time inflation reemerged from a three-decade hibernation, Astoria Portfolio Advisors and CEO ...

December 19 2023
5 Min Read

Today we face a challenge that lay dormant for years. Inflation rose rapidly in 2021 driven by pande...

December 12 2023
5 Min Read

Inflation has been a top financial headline for a while due to its pervasive impact on consumers, bu...