The stock markets have had a bumpy start to 2022, and with the current geopolitical instability, it’s possible the uncertain times will continue. Many investors consider gold as the ultimate asset in unpredictable times. I prefer holding an exchange-traded commodity (ETC) rather than physical gold. Once again I’m looking at why I consider iShares Physical Gold ETC (LSE: SGLN) one of the best ‘safe haven’ funds for my own portfolio.
My safe haven hedge against uncertainty
I’ve been holding iShares Physical Gold ETC for some time now. This fund tracks the spot price of gold, but trades like a share so can be bought and sold through most online brokers.
Its place in my portfolio is justified for two reasons. First, gold has long been considered a hedge against inflation. Simply put, inflation decreases the purchasing power of a currency, so you need more currency to buy the same amount of gold.
Second, gold can provide protection against a sudden market downturn. The price of gold is largely seen as negatively correlated with stock prices, since when the market collapses, investors often flock to the asset as a safe haven.
For example, when equity markets see a negative shock, like they did in March 2020, physical assets like gold tend to rise. In fact, looking at 2020 as a whole, the FTSE 100 fell more than 14%. In contrast, gold had one of its best years in a decade.
What could happen to the price of this ETC?
This ETC has been trading since 2011 and since then, I believe there have been a couple of notable stock market falls. During 2018, when the FTSE 100 declined by around 12% in the year, the price of this fund rose by over 3%. Also, during 2020 it increased by almost 20%.
2021 was a good year for stock markets and during the course of the year, this ETC fell by almost 6%. However, 2022 already seems to be shaping up differently and we have already seen a general decline in stock markets. In comparison, iShares Physical Gold ETC has enjoyed a 4% price rise year-to-date. Although I could be wrong, it’s possible that this fund will see further gains.
Worries about inflation, rising interest rates, and escalating geopolitical tensions might well see investors rushing to protect their wealth. This could drive up prices of ‘safe haven’ assets including gold. If so, iShares Physical Gold ETC should also see a price rise.
Nothing is certain, of course. Gold does not pay any dividends and so the return is entirely dependent on the price appreciation of the asset. It’s possible investors might shun the precious metal in favour of alternatives such as high dividend-yielding shares. In this scenario, maybe the price of this ETC will fall.
However, I think the key to building any resilient investment portfolio is diversification and I still think of iShares Physical Gold ETC is one of the best safe haven funds for my portfolio. I’m happy to continue holding a small allocation of it within my portfolio as a hedge against turbulent times.