The Current Investment Case For Gold

Did gold do its job last year when Consumer Price Index¹ inflation peaked at a little more than 9% and averaged 6.45%?² Given that gold is often viewed as an inflation hedge, it’s understandable that some investors were disappointed when gold spot prices were virtually flat, returning negative 0.3% for the year.³

But the picture looks different when comparing gold’s performance to that of other so- called inflation-fighting assets in 2022. A proxy for Treasury inflation- protected securities, the iShares TIPS Bond ETF⁴, returned negative 12%.⁵ As for real estate, the Dow Jones Equity REIT Total Return Index⁶ returned negative 25%.⁷

Meanwhile, the iShares S&P 500 Index ETF⁸ suffered a loss of 18%⁹ and the iShares Core US Aggregate Bond ETF¹⁰ fell by 13%.¹¹ Overall, gold’s price decline of less than one-half of one percent made it a relative outperformer by a significant amount in a year when most asset classes suffered larger losses.

Roughly $23 billion worth of gold—or about 400 tons—was sold last year by exchange- traded fund investors.¹² But the price of gold remained nearly flat thanks to record- setting purchases by central banks and government entities which hold gold as a bulwark of their monetary system or part of their foreign currency reserve.

Follow The Fed

It’s important to pay attention to how gold reacts to Federal Reserve (Fed)¹³ interest rate policies because historically there has been a consistent interplay between the price of gold and pauses in Fed rate hikes.

For example, in 2000 the price of gold rose nearly 56% after the Fed paused its rate hikes.¹⁴ When the Fed paused in 2006, gold rose 230%.¹⁵ And when the Fed paused in 2018, gold rose a little less than 70%.¹⁶ Considering the constant speculation about when the Fed will pause or reverse its rate hikes, it’s worth noting that gold benefitted during the prior three times that the Fed paused.

Three Scenarios For Gold In 2023

We foresee three possible outcomes for gold this year:

The Fed is correct: ‘higher rates for longer’ are needed. This could equal a stronger U.S. dollar and weaker gold prices. If that’s your high-conviction view, you should be at the lower end of your gold allocation. But keep an eye on central bank buying of gold because it can make a big difference, as it did last year.
The Market is correct: soft landing ahead, the Fed is almost done hikes, may cut by year end. Remember, there has been a strong correlation during the past two decades between a jump in gold prices and a pause in the Fed’s hiking cycle. In this scenario, the U.S. dollar weakens and gold prices go higher.
History is correct: Historically, the Fed over tightens, causes a moderate recession, and big interest rate cuts will be needed to stabilize the economy. This could result in a weaker U.S. dollar and stronger gold prices.

The outlook seems to shift weekly, and predicting which scenario will prevail is difficult considering that the Fed’s maneuvering is akin to trying to land aircraft on an aircraft carrier that’s bobbing up and down in a furious, raging sea.

Incorporating Gold Into A Diversified Portfolio

There are four main ways to access gold. The most direct method is to own physical gold in the form of bars or coins, which involves setting up a custodial relationship for gold storage. But that creates an operational challenge for most investors, including dealing with security issues that don’t come into play with other investment vehicles.

Alternatively, gold futures¹⁷ can be a substitute for holding physical gold. But these have their own set of challenges, such as price dislocations between physical gold and prices in the futures market generated from the costs to renew frequently expiring futures contracts.

Another method is owning the equity of a gold mining company. But 2022 was a reminder that the stocks of gold miners come with the associated risk of owning equities including production halts and labor work stoppages. Most gold miners last year were down about 8% versus gold’s decline of less than one-half of one percent.

A fourth option entails owning physically backed gold ETFs. The first physically backed gold ETF was launched in 2003, and investors increasingly choose ETFs as their vehicle of choice for accessing gold for reasons ranging from liquidity to ease of use.

Each of these four methods have their nuances and pros and cons, but investors are turning to gold-backed ETFs to avoid some of the operational hurdles associated with accessing gold.

^{1. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.}
^{2. Bloomberg data 1/1/2021 to 12/31/2022}
^{3. Bloomberg data Gold price return 12/31/2021 through 12/31/2022}
^{4. The iShares TIPS Bond ETF seeks to track the investment results of an index composed of inflation-protected U.S. Treasury bonds.}
^{5. Bloomberg data 1/1/2021 to 12/31/2022}
^{6. The SPDR® Dow Jones® REIT ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the Dow Jones® U.S. Select REIT IndexSM (the “Index”)}
^{7. Bloomberg data RWR ETF return 12/31/2021 through 12/31/2022}
^{8. The iShares Core S&P 500 ETF seeks to track the investment results of an index composed of large-capitalization U.S. equities.}
^{9. Bloomberg data IVV ETF return 12/31/2021 through 12/31/2022}
^{10. The iShares Core U.S. Aggregate Bond ETF seeks to track the investment results of an index composed of the total U.S. investment-grade bond market.}
^{11. Bloomberg data AGG ETF return 12/31/2021 through 12/31/2022}
^{12. Bloomberg data Gold ETF holdings 12/31/2021 to 12/31/2022}
^{13. The Federal Reserve System is the central banking system of the United States}
^{14. Bloomberg data Gold return 5/24/2000 to 01/09/2004}
^{15. Bloomberg data Gold return 6/15/2006 to 09/05/2011}
^{16. Bloomberg data Gold return 11/27/2018 to 08/06/2020}
^{17. A futures contract is a legal agreement to buy or sell a particular commodity asset, or security at a predetermined price at a specified time in the future.}

IMPORTANT INFORMATION

PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RESULTS. The statements and opinions expressed are those of the author and are as of the date of this report. All information is historical and not indicative of future results and subject to change. The reader should not assume that an investment in any securities and/or precious metal mentioned was or would be profitable in the future. This information is not a recommendation to buy or sell. Past performance does not guarantee future results.

The abrdn Gold ETF Trust is not an investment company registered under the Investment Company Act of 1940 or a commodity pool for purposes of the Commodity Exchange Act. Shares of the Trust are not subject to the same regulatory requirements as mutual funds. Commodities generally are volatile and are not suitable for all investors. Trusts focusing on a single commodity generally experience greater volatility. Please refer to the prospectus for complete information regarding all risks associated with the Trust. Shares in the Trust are not FDIC insured and may lose value and have no bank guarantee.

The value of the shares relates directly to the value of the precious metal held by the Trust and fluctuations in the price could materially adversely affect investment in the shares. Several factors may affect the price of precious metal, including:

A change in economic conditions, such as a recession, can adversely affect the price of the precious metal held by the Trust. Some metals are used in a wide range of industrial applications, and an economic downturn could have a negative impact on its demand and, consequently, its price and the price of the shares;
Investors’ expectations with respect to the rate of inflation;
Currency exchange rates;
Interest rates;
Investment and trading activities of hedge funds and commodity funds;
Global or regional political, economic or financial events and situations. Should there be an increase in the level of hedge activity of the precious metal held by the Trust or producing companies, it could cause a decline in world precious metal prices, adversely affecting the price of the shares.

Also, should the speculative community take a negative view towards the precious metal held by the Trust, it could cause a decline in prices, negatively impacting the price of the shares. There is a risk that part or all of the Trust’s physical metal could be lost, damaged or stolen. Failure by the custodian or sub-custodian to exercise due care in the safekeeping of the metal held by the Trust could result in a loss to the Trust. The Trust will not insure its metal and shareholders cannot be assured that the custodian will maintain adequate insurance or any insurance with respect to the metal held by the custodian on behalf of the Trust. Consequently, a loss may be suffered with respect to the Trust’s metal that is not covered by insurance.

Investors buy and sell shares on a secondary market (i.e., not directly from Trust). Only market makers or “authorized participants” may trade directly with the Trust, typically in blocks of 50k to 100k shares.

Diversification does not eliminate the risk of experiencing investment losses.

Trading in commodities entails a substantial risk of loss and is not suitable for all investors.

Commodities generally are volatile and are not suitable for all investors. Carefully consider the Fund’s investment objectives, risk factors, and fees and expenses before investing. This material must be accompanied or preceded by prospectus. Please see the prospectus for abrdn Physical Gold Shares ETF.

Please read the prospectus carefully before investing.

ALPS Distributors, Inc. is the marketing agent.

ALPS is not affiliated with abrdn.

ETF002011 2/28/24

US-270223-188568-1

View abrdn Precious Metals Combined Prospectus