ETF Expert Corner

ETF Securities’ Max Gold Discusses Current Gold Market, 2018 Gold Outlook, & Bitcoin

January 9th, 2018 by ETF Store Staff

Maxwell Gold, Director of Investment Strategy at ETF Securities, discusses the current gold market, a bull and bear case for gold in 2018, and bitcoin.


You can listen to our interview with Maxwell Gold by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: Our guest today is Maxwell Gold, Director of Investment Strategy at ETF Securities. Here in the US, ETF Securities offers eight ETFs. Those ETFs have over $2.5 billion invested in them and their focus is on precious metals and commodities. Currently, their most popular ETF is the ETFS Physical Swiss Gold Shares, ticker symbol SGOL. This is a physically-backed gold ETF and gold is going to be the topic of our conversation today. Max is joining us via phone from New York. Max, great to have you back on the program.

Max Gold: Yeah, great to be here. Thanks for having me guys.

Nate Geraci: Max, last year was a pretty good year overall for gold. The Physical Swiss Gold Shares ETF I just mentioned was up about 13%. But I've got to tell you, it was at least a little bit surprising to me just given the fact that stocks had such a strong year. We also saw short-term interest rates start to rise. To begin here today, what was your take on gold's performance last year?

Max Gold: I think if you look in a little bit longer term, gold actually had a pretty strong year last year, following up a stronger year the year before as well. We've had about a two year run between 2016 and 2017 where gold has risen almost 20%. The thing is, that's been sort of under the radar because we have seen such a strong rise in equities markets, particularly the US and emerging markets. I think that if you look at it, gold, despite some of the headwinds of rising risk on sentiment, of a continued rising and tightening by the Fed, gold has actually remained very robust. I think that there are a couple of factors of why that has been. The biggest is that we are beginning to see a rise of inflation and inflation expectations across the board, as well as the dollar last year was very weak. It fell about 10% and that was a big surprise to a lot of participants at the start of the year where many expected the dollar to continue to rise as the Fed continued to raise rates. The fact that the dollar weakened about 10%, that's another form of inflation if you think about it in terms of your spending power here in the US. Your dollar weakens, essentially, the currency is worth less, you have less spending power. So that's another form of inflation that has, overall, helped gold, which has that negative relationship between gold and the dollar.

Nate Geraci: What about the impact of bitcoin and other cryptocurrencies? Obviously, gold performed pretty well last year, but bitcoin was, without question, the biggest story in the market. As I'm sure you're aware, bitcoin has been called digital gold. Do you think some investors are moving away from gold and into cryptocurrencies instead?

Max Gold: I'm not a big proponent of the camp that cryptocurrencies are overshadowing gold and that they are sort of the same as gold. I don't doubt that there are some maybe small buyers certainly who have bought gold that decided to buy some bitcoin or cryptocurrencies. But I really think it's the fact that we have seen such a strong rise in equity markets and other risk assets that really detracted from some inflows of gold. But if you look at global gold ETFs last year, assets rose about 11-12% last year, so that's still a strong rise of increase of assets for demand for gold by investors. But, really, if you look at bitcoin, comparing that to gold, I really don't see them as being hand-in-hand or even serving the same investment utility or purpose. The reason being is that a lot of people try to associate gold and bitcoin or other cryptocurrencies as sort of the same function. But for really, I think, three reasons that's not the case. The first is the fact that cryptocurrency, such as bitcoin, they have a very short-term track record and they haven't really proven as a store of value. The biggest reason being, if you look at the volatility since bitcoin's been incepted back in 2010, it's annualized volatility is about 111%. Compare that to gold, which its annualized volatility over that period is about 16%. So bitcoin has been about seven times as more volatile as gold over the last seven years or so. I think that doesn't really go hand-in-hand with a good store of value over time. Additionally, the buyer motivations have been different between gold and bitcoin. If you look at it, mostly what caught a lot of headlines at the last couple months of last year, has been the meteoric rise in price and so we have seen a lot of return chasing - a lot of speculation in cryptocurrencies and bitcoin in reaction to that momentum of that price rise. Additionally, there is some illicit and illegal activities anchored into cryptocurrencies that has increased in demand over time. That, overall, I think is sort of anchored more to what I'd call return-oriented buying. Comparing that to gold investment - gold investment I view much more, first and foremost, as more the other side of the coin. It's much more they're looking for downside protection, really that risk hedging or that risk management orientation. One is sort of chasing returns, the other is sort of looking to protect on the downside and looking to protect against risk. So I think that gold is more investment demands anchored to that downside protection whereas that bitcoin, the price rise we've seen has been much more focused on outperformance, rising prices, and return chasing. I don't see that motivation between why you would buy bitcoin and gold the same from an investment perspective. Finally, if you think about it, bitcoin itself has no real utility. Gold, even if it was deemed we have no use - as a pseudo-currency, as an asset, as an investment - at the end of the day, gold would still be used because of its unique chemical and physical properties. It'd be used in adornment, in art, in jewelry, as well as for technology in our smartphones, in our computers. It's a great conductor of electricity and doesn't overheat very well. Overall, gold, at the end of the day, would still have a utility in the real world. That's not the same for bitcoin. If we decided bitcoin or cryptocurrencies - we don't have any use or faith in them, we don't want to use them in our daily transactions - it really wouldn't have any real world utility. So that's another key difference where there is a real world demand for gold.

Nate Geraci: Max, as you look forward, is there any scenario where you could see bitcoin or other cryptos begin to have a meaningful impact on the price of gold? Or, perhaps, cryptos are viewed as a suitable replacement and so maybe that puts some pricing pressure on gold?

Max Gold: I think that we, on the edges, we saw a little bit of that last year. But I don't think that you begin to see that substitution one-for-one for gold. I think that it's tough because gold has been used in the monetary system going back to about 700 BC. It's still used today as a reserve asset by central banks such as the Fed, the BOJ, the ECB today. I think it does have that long track record of competition, so it may be difficult to get there, but I do think that the overall digital currency or some form of cryptocurrency can begin to evolve once it hits a little bit more of a stabilization and less volatility. Because if it is viewed as a currency, it needs to pass a much more stability and faith and backed by some kind of government regulation. I think we'll begin to see some kind of more modern day utilization of cryptocurrencies.

Jason Lank: Max, this is Jason Lank. Geopolitical risks can certainly be a driver on the demand side for gold. We can't turn on the TV without hearing about, "My button is bigger than your button," or Saudi Arabia and Iran, their conflict. But let's talk about the supply side, for a moment. How geographically diverse are gold mines? Is there any single country, or continent risk, in terms of gold and where the production comes from?

Max Gold: That's actually a great point because what's unique about the supply of gold, unlike other metals out there - whether they be precious metals or industrial metals, like copper - it is one of the more geographically diverse, in terms of supply globally. I believe the biggest producer out there currently is China. The US, Russia, South Africa are still big producers, as well as – Australia - but no country has really produces more than about 20% of annual supply of gold. Additionally, that only accounts for about two-thirds of supply. Another third of annual supply comes from the recycling side. As jewelry fabricators look to sell gold and repurpose them, as scrap comes from different sources of say, used cellphones or other technologies, that begins to come online as another source of supply and accounts for about one-third of annual supply. I don't see supply disruptions as really being that impactful to the gold price day-to-day or throughout the year as say, some other metals out there, particularly say, platinum and palladium, which are more geographically concentrated to just a few countries.

Nate Geraci: Our guest today is Max Gold, Director of Investment Strategy, at ETF Securities. Max, let's talk a little bit about the demand side of gold and, perhaps, look at your gold outlook for 2018. I know you recently outlined both a bull and a bear case for gold. Can you walk us through each of these just at a high level and maybe explain a few of the key drivers that could push gold one direction or the other?

Max Gold: Yeah, happy to do so. I think that the biggest drivers for gold prices, this year especially, is going to be monetary policy and really what the Fed does in terms of how many rate hikes and what that means for real interest rates. And, really, what we'll do with volatility and, as a dovetail, being geopolitics. But also, I think there's a lot of risk out there from financial markets. We're seeing stretched valuations. I think if we do see the Fed hike only two times this year, and we see inflation hit closer to 3%, gold could certainly get closer to about 1400, 1425 per ounce. Right now, we're at about 1310 per ounce today. Gold has had a strong rally over the last couple of weeks, but I do see that it has potential to go higher if we do see inflation pressures continue to build and the Fed remains dovish only hiking two times this year. Additionally, if we do see the Fed say, maybe, hike even quicker and its tightening path begins to accelerate and hikes say, about four times this year, that could certainly weigh on the gold price. I think that would see a strengthening of the dollar much quicker with those rate hikes. That could push gold closer to about 1150 per ounce.

Nate Geraci: Max, you mentioned perhaps stretched valuations in the financial markets. I'm curious, if you look at the data historically, is gold a reliable hedge if stocks do take a significant downturn?

Max Gold: It is and that's one of the big reasons why you want to look towards gold if you're concerned about drawdowns, particularly in equity markets. A lot of investors like to make the assumption that I can get exposure through say, gold miners, or other kinds of similar exposures to the gold market. But that's really not the case, because if you actually look at when we've seen historically large drawdowns in US equities, say 10% or more, this doesn't happen very frequently, but it's sort of the drawdowns we experienced back in 2008, 2001, during the tech bubble, 1998, or even 1987. On average, when we do see those large drawdowns of 10% or more, on average, the S&P has fallen about 20% over those periods. Now, if you look at the price of gold, gold has actually risen about 7% over those same periods, on average. If you compare that to gold miners, miners have been down 7% over those periods. Bottom line is, when we do see large drawdowns and heightened volatility in US equities, on average, gold outperforms gold miners by a 14% difference. That's certainly about a 27% difference compared to on average for US equities.

Nate Geraci: Similar question as it relates to inflation. I don't think there's any question some of gold's recent price moves have been driven by growing concerns over inflation. But I'm curious, what does your research actually show in terms of gold's ability to serve as a viable inflation hedge? Because, I feel like, I've seen conflicting data on this.

Max Gold: It's actually interesting. I know gold's often associated as a great inflation hedge, but I've done a lot of research around this. In actuality, it's a bit of a misnomer. Gold, actually, is a terrible hedge against US inflation. Where inflation comes into play, in terms of how it drives gold prices, is really its impact to real interest rates. We're beginning to see inflation expectations rise. We're seeing CPI and PCE measures begin to pick up. We're seeing a weaker dollar, which is inherently inflationary and this all translates to a low real rate environment. Even though we're seeing the Fed tighten and begin to hike in this current tightening cycle, potentially two to three times this year, it really depends - how is that reactive or proactive to rising inflation? Overall, we're seeing real interest rates remain about 40 to 50 basis points on a 10-year basis. Historically, as long as those real interest rates are below 2%, gold has performed positively, on average, on a given month. Bottom line is, as long as real interest rates remain anywhere from zero to 2%, that's an accommodative environment for gold prices to still perform positively.

Nate Geraci: Again, our guest is Max Gold, Director of Investment Strategy at ETF Securities. Max, we have just a few minutes left here. Anytime we talk gold on the program, I feel like it's important to reiterate the investment rationale for owning gold as part of a well-diversified portfolio. My sense is many investors either love gold or they hate it, but I think it's perfectly fine to fall somewhere in the middle. You've covered several of the reasons to own gold, but let's just boil this down for our listeners. For longer term investors, why own in gold in a portfolio?

Max Gold: I think what's unique about gold is it does protect against drawdowns, against equity risk. It does have that low correlation and it provides those diversification benefits. But what's unique about gold, and what I try to relay to clients, especially from a longer-term perspective, is that what's great about gold is it's a very robust hedge. It's great if you want to hedge against something exactly you know ahead of time what you want to hedge against. So say, I want to hedge against inflation rising, or I want to hedge against a specific contract, you can do so. But what a lot of investors - a lot of times what we are dealing with are sort of unknown risks or left tail events. What's great about gold is that it's very robust. It hedges against inflation. It hedges against real interest rates. It can hedge against equity risk or say, a tail risk event like 2008. I think where its dynamic ability to hedge against multiple facets of risk and multiple dimensions of risk is really the powerful diversifier and powerful portfolio tool that gold can play. It's really, what I think about gold is, is its role as that risk management tool, or that role as a risk management asset. I don't put it in my portfolio to outperform equities. I don't put it in my portfolio to generate income. I put it in my portfolio to provide that source of diversification to hedge against risks, both known and unknown, and really to provide a key utility of risk management against my equity and fixed income in a diversified portfolio.

Jason Lank: Max, that's an excellent case for getting exposure to gold, but the devil is also in the details. There are different ways to get that exposure. There are paper gold products, or futures based. There are physically-backed products. Make the case for your preference on how investors who are thinking about adding exposure might go about doing it.

Max Gold: I think the best way to get that source of diversification and the true risk management benefits of gold is investing in the gold price. I think that a great cost effective manner to do so is investing in a physically-backed ETF, which gives you direct exposure to the gold price. Our firm, our ticker is SGOL, which is physically-backed Swiss gold. That's a great way to get exposure to the gold market and generate the benefits from having a gold allocation in your portfolio.

Nate Geraci: Max, with that we'll have to leave it there. As always, just tremendous insight into the gold market. We certainly appreciate you joining us on the program today. Thank you.

Max Gold: Thanks guys.

Nate Geraci: That was Max Gold, Director of Investment Strategy at ETF Securities and you can learn more about their lineup of ETFs by visiting