ETF Expert Corner

ETF Securities’ Maxwell Gold on Current Precious Metals Landscape

March 7th, 2017 by ETF Store Staff

Maxwell Gold, Director of Investment Strategy at ETF Securities, surveys the current precious metals landscape and offers his perspective on why owning precious metals in a portfolio can make sense.


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: I'm now very pleased to welcome to the program Maxwell Gold, Director of Investment Strategy at ETF Securities. Here in the US, ETF Securities offers five precious metal ETFs. These include gold, silver, platinum, and palladium. These are all physically backed by the actual precious metals themselves and, overall, there's currently nearly two and a half billion dollars invested in these five ETFs. Max is joining us via phone today from New York. Max, welcome to the ETF Store Show.

Maxwell Gold: Thanks Nate. Thanks for having me on.

Nate Geraci: Max, I thought we might start today by looking at the current landscape for gold. Year-to-date, the ETFS Physical Swiss Gold ETF, ticker symbol SGOL, it's up over 7%, and I think this may surprise some investors just given that we've seen an uptick in interest rates. Of course, the Fed is expected to raise rates again next week, gold doesn't pay any interest, so as interest rates rise, the opportunity cost of owning gold becomes greater. What's been driving the price of gold so far this year?

Maxwell Gold: That's a great point. So overall, we've seen a turnaround year for gold, beginning last year. It was up about 8.5%, a lot of uncertainty last year, which has fed into the market so far year-to-date in 2017. But to your point, a key driver for gold in particular is real interest rates. So we're seeing a lot of focus, the Fed has continued to tighten policies, raise rates last in December, now the expectation is March, looks like it's very much a live meeting for another hike. But overall, what we're seeing at the same time is rising inflation and when you put those two pieces together of nominal rates, whether it be a 10-year measure, or the Fed policy rate, in conjunction with rising inflation, the real interest rate or the real cost of financing and borrowing is still very low. At about five year basis it's about zero, and about ten year basis it's about 40 basis points. Historically, gold performs well when real interest rates are anywhere up to about 2% on a real basis. It's really that sensitivity to real rates, which is one of the key drivers for gold.

Nate Geraci: What about just general uncertainty out there? Whether it be the uncertainty of Trump's policies, you look over at Europe, obviously we had the Brexit last year, there are several very important elections in EU member countries this year, other geo-political concerns, whether we look over at Russia. How much of a factor has uncertainty played?

Maxwell Gold: That has been a key factor. We see that a lot in investor incentive, and especially flows into physically backed gold ETFs. Actually last year, for example, was actually the second best year ever for inflows into physically backed gold ETFs, only behind 2009. When you take a look at that, sort of you scratch your head and say, "Well, you know, 2016 was a tough year, but by no means was it as bad as 2009 on the heels of the crisis." So overall, what we're seeing is a rise of overall volatility, uncertainty, and that certainly plays in the factor for demand for gold as a risk hedge, particularly as you see economic and policy uncertainty, we see a correlation historically with the returns for gold over the past 20 or 30 years. That has fed into a demand for gold from investors, which were really lacking in recent years, particularly since gold hit the peak in 2011.

Nate Geraci: Max, for the average investor, how do you explain the rationale for owning gold in a portfolio? In other words, what's the investment case for a longer-term strategic allocation to gold?

Maxwell Gold: We get this question a lot, and really what I try to emphasize to anyone who approaches me with this question is that first and foremost, we view gold in conjunction with other precious metals as a core risk management tool. Certainly, in the environment, the investment landscape we're dealing with today, in my view, the scarcest commodity is actually true diversification. It's very difficult to find asset classes that are uncorrelated to risk, uncorrelated to equity volatility, and gold and precious metals are one of the few exceptions where they still are persisting a very low correlation and provide that source of potential hedge or downside protection, as well as increasing portfolio efficiency through adding the benefit of diversification. Really, what I try to emphasize is that regardless of your risk profile for your portfolio, there are benefits from adding a non-zero allocation. So the applicable allocation of gold and precious metals is never zero, so I emphasize that there's a certain cap to that. Overall, I view it much as that core risk management tool property first and foremost above say any capital appreciation or capital preservation properties.

Nate Geraci: Alright, let's move on to silver now. Silver is interesting because on one hand, it can be thought of like a safe haven or currency replacement similar to gold, but on the other hand, it's much more of an industrial metal. It's clearly tied to the economy. Year-to-date, the ETFS Physical Silver ETF, ticker symbol SIVR, it's up over 12%. I'm curious, are the same factors driving gold right now also driving silver? Or, are there some other factors at play here?

Maxwell Gold: I think there are some other factors. We're actually seeing a deviation between gold and silver and some of the other industrial sensitive precious metals so far this year. Actually, our expectation is that silver is going to be one of the top performers in the precious metals complex. We do see benefits driving silver, to your point, primarily that industrial application. About 50% of annual demand for silver comes from industrial applications, including electronics and electrical demand, its demand as an ethylene oxide catalyst, as well as a growing source of demand, it's about 10% per year is demand for solar panels and photovoltaic cells. That industrial demand is much more sensitive to the broader global growth and global economic picture. That, in conjunction with rising inflation, is much more of a sensitive factor for silver, which does have such a high levered exposure to the overall global economy. We see that coming into play much more in sort of a continued recovery of the global economy and rising inflationary pressures this year, which should persist to see silver potentially outperform gold as we do see that demand for its industrial usage continue to increase. It does have about an 80% correlation to gold, so it does act as that additional hedge, as well as that potential monetary asset. But overall, in this environment, we are seeing a bit of a deviation between silver and gold so far. Even last year, where silver actually outperformed 15% and gold was only up about 8.5%.

Nate Geraci: Again, we're visiting with Max Gold, Director of Investment Strategy at ETF Securities. We're talking precious metals today. Max, two other ETFs offered by ETF Securities are the Physical Platinum Shares, ticker symbol PPLT, and the Physical Palladium Shares, ticker PALL. Both of these metals, platinum and palladium, I think these are much less known to everyday investors. First, what are some of the uses of both of these metals? How should investors think about them compared to gold, for example?

Maxwell Gold: When you talk about platinum and palladium, they are even more sensitive towards industrial usage and sort of industrial production. Starting with platinum, really about 40% of annual demand is tied to the global auto industry through usage as auto catalysts or catalytic converters. That's primarily in diesel engines or diesel cars for platinum. On the flip side, palladium is much more levered toward gasoline auto engines. When you're talking about platinum, about 40% of annual demand is tied to those diesel engines, but 20% of that 40% is coming from the European diesel market. Between European diesel auto demand, in conjunction with Chinese jewelry as another source of platinum, that constitutes a large part of demand. So really very cyclical factors in terms of auto demand globally, as well as jewelry demand, particularly in emerging markets such as China. Those are key drivers for platinum. Additionally, platinum is driven much more by its fundamentals, because it's actually very unique in the precious metals space where about 75% of supply is concentrated to one country, and that country is South Africa. When we have seen recent supply deficits in previous years, that has been a key driver towards the overall market balance and has actually been a boom for platinum. But when you shift over to palladium, it has a very concentrated supply. About 80% is concentrated within South Africa and Russia on an equal basis. Even more so, palladium has some of the most attractive fundamentals in terms of its supply deficit for about six years and is expected to persist in supply deficit in the future as well. That certainly has been a catalyst for palladium, which was the top performer last year, up about 20%, and so far is persisting with global economic demand and rising inflationary pressures. It's up about 10% this year. We see palladium has a high correlation to more traditional industrial metals. As about 70% of palladium demand annually, is tied toward the global auto catalyst demand, or really gasoline car demand.

Nate Geraci: Max, I think clearly both of these metals are much more tied to the economy. You mentioned the performance last year. If we look this year, the platinum ETF is up over 10% and the palladium ETF is up nearly 14%. Does that speak to some greater strength economically in your opinion?

Maxwell Gold: I think it does. Our view is that we are expected to continue to see a global economic recovery. We do expect that most of that growth is going to be stimulated from emerging markets. Really, they are going to continue to be the growth catalyst for the global economy. We're seeing continued chug along growth in the US and other developed markets, but still some questions around Europe and Japan on an economic basis. Overall, we're seeing rising demand for commodities, so obviously last year was a turnaround story for commodities and those industrial sensitive precious metals - particularly silver, platinum, and palladium - which are highly levered towards industrial applications and industrial usage - are going to continue to see increase in demand in conjunction with a rising growth story, as well as rising inflationary pressures. We do see these as potentially having further economic catalysts this year, as opposed to say gold, which typically sees higher demand in times of more financial volatility or market turmoil.

Nate Geraci: With that in mind, you talked earlier about the rationale for owning gold in a portfolio. What about silver, platinum, and palladium? Are these more speculative? Or, is there a case to be made for a longer-term core allocation of these metals?

Maxwell Gold: We do see some interest, particularly in the platinum, palladium space, more of a shorter term, tactical position. But overall, I do see the benefit for a diversified exposure to all four precious metals. I certainly think the anchor should be in gold and silver, but from a smaller exposure to platinum, palladium, makes sense, particularly when we are in sort of this up-cycle of the overall economic or business cycle, where we're seeing expansionary growth globally, rising inflationary pressures. Those typically see silver, platinum, palladium outperform gold, as we saw last year and we're continuing to see so far this year. Overall, I think that over a full economic cycle, a diversified exposure to all four precious metals can be benefited from still providing the low correlation to equity and other risk assets, while still providing some potential upside to potentially provide tracking with increasing growth globally. From that perspective, I do see the benefit from potentially looking beyond just gold as part of your strategic long-term allocation as a core risk management tool within precious metals.

Nate Geraci: Lastly, before we let you go today, obviously there are many different ways for investors to gain exposure to precious metals. They can buy the physical metals themselves, they can buy futures contracts, the stocks of individual mining companies. What specifically do you view as the benefits of accessing precious metals through physically backed ETFs?

Maxwell Gold: I think that what's great about physically backed ETFs is you're getting pure price participation in a very cost effective and liquid manner. If you're looking to get exposure and maintain market accessibility, I think physically backed precious metals are one of the most cost effective and most efficient ways to gain access to the market. When you compare it to say some other vehicles, futures are not necessarily the most viable option for a lot of investors, particularly on the retail side. There's other considerations, such as roll yields and contango and backwardation of the market and if you look at say, a lot of interest in gold mining equity stocks, for example. When you compare say, gold and precious metals, their performance of the physical market compared to the miner equities, they don't provide that same downside protection or risk management benefits, or even diversification benefits, because at the end of the day, what is driving those are equity factors. Those companies are driven by earnings and profitability, the financial health of the companies, as well as the overall industry trends of the mining sector. When you actually evaluate it, you don't see that downside protection when you see on average 10% or more drop in the S&P. We've seen gold, on average, up about 7% over 10% or more drops, while gold mining indices are actually down 7%. You don't really see that really the hedge, the downside protection, or that risk management and diversification benefit from other avenues, as opposed to say getting exposed to the physical market.

Nate Geraci: Max, we have about two minutes left here. When you talk about physically backed ETFs, I think there's a very small minority of investors out there who question whether or not the ETFs actually own the physical metals. I was hoping, can you just maybe expand on the process that ETF Securities uses to maybe get the individual investor comfortable that the ETFs own what they say they own?

Maxwell Gold: Certainly. We strive for certainly going above and beyond in terms of transparency. When you look at any of our physically backed metals products, we are 100% backed by physical, allocated bars that are stored either in vaults in Zurich, Switzerland, or London, England. Certainly, we provide a daily bar list so you can look up each individual bar under each fund and see that this is the serial number, the refiner, the purity, the fineness. We provide that daily bar list on our website, Overall, we strive for transparency to ensure investors that yes, our products are tracking spot, they're 100% physically backed in allocated form in the form of whether it be delivery bars, or other bars. Certainly, we try to provide as much transparency from that perspective. We do think that physically backed ETFs are one of the most cost effective and efficient ways to gain access to physical bullion, or spot price, whether it be gold, or silver, or platinum and palladium, because when you are looking to get exposure, what's great about ETFs is that you're pretty cost efficient in terms that they have very low premiums to the spot price. If you're to look up the gold price of the market today, it's at about $1,220. If you look at the percent change moves in our products, they're essentially moving one for one less than annual expense ratio. Certainly, you don't have to deal with trying to find whether you want to exit or enter the market as someone who's willing to buy or sell if you say whole physical bars and coins yourself. Because you have continuous accessibility to the market, you can enter and exit the market providing that liquidity and that market accessibility through a physically backed ETF while still maintaining that price participation and exposure to the spot price.

Nate Geraci: Well, Max, with that, we'll have to leave it there. Just tremendous insight into precious metals and precious metal ETFs today. We certainly appreciate your time and we hope to have you on the program again down the road. Thank you.

Maxwell Gold: Absolutely. Thanks a lot, Nate.

Nate Geraci: That was Max Gold, Director of Investment Strategy at ETF Securities. As he mentioned, you can learn more about their precious metal ETFs by visiting