Suitability of "Hedged" Gold ETFs?

Discussion of the Gold portion of the Permanent Portfolio

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DJCHighwell
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Suitability of "Hedged" Gold ETFs?

Post by DJCHighwell » Wed Jun 26, 2019 6:07 am

Hi,

I'm a PP newbie from the UK and would be grateful for any advice you may have on the suitability of Gold ETFs that are "hedged" to reduce the impact of currency variations.

The only two funds I've found that I'm able to use within a UK tax-deferred pension wrapper I have are the XTRACKERS PHYSICAL GOLD GBP HEDGED ETC (XGLS) and ETFS HEDGED METAL SECURITIES LTD DAILY HEDGED PHYSICAL GOLD (GBSP)

Can anyone see any problems using either of these or any currency "hedged" gold ETF?

Thanks in anticipation of any guidance!
Pet Hog
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Re: Suitability of "Hedged" Gold ETFs?

Post by Pet Hog » Thu Jun 27, 2019 1:12 pm

Others probably understand this better than I do, but I'll give it a shot.

I think gold is best considered a currency, rather than a commodity. It has its own exchange rate, if you will, with respect to all of the other currencies. So gold measured in GBP can be considered without worrying about its value in USD or any other currency, even if it is formally valued in USD. The PP, as I understand it, is designed with the individual investor's location in mind. You hold gold because it's a hedge against your own currency's fluctuations, especially its devaluation. I don't know a thing about hedged ETFs, but the concept alone makes me think they go against the PP philosophy. It sounds like you what you are considering is analogous to holding 25% of your UK-PP in USD, but then hedging against currency fluctuations in the USD. It makes no sense and defeats the purpose. Currency fluctuation is the reason we hold gold.
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Smith1776
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Re: Suitability of "Hedged" Gold ETFs?

Post by Smith1776 » Thu Jun 27, 2019 1:31 pm

As a general principle, I personally recommend that investors don't use currency hedging with their gold holdings.

Currency hedging exists with gold because it is typically priced and quoted in U.S. dollars. However, it's important to remember that gold is not inherently a U.S. Dollar denominated asset. It's just typically quoted in U.S. dollars.

The unhedged ETF will give you gold's return in your domestic currency. The hedged ETF will deliver to you the return that a U.S. investor with U.S. Dollars would experience with gold. In other words, the hedged ETF would give you the same exposure to gold as if you were living and investing in America instead of the UK.

Hedging as a concept normally reduces risk. However, in this case, hedging is actually increasing your risk because you're implicitly making an active bet that the U.S. dollar will go down. If you buy the hedged ETF, you are effectively going long on gold and short the dollar. Additionally, hedging is not free. There will be a small erosion in the fund's performance due to the cost of hedging.

Just my 2 cents. I personally stick with unhedged gold holdings. As far as I'm concerned, the only hedging that should be done in a portfolio is the foreign currency risk associated with international bonds.
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DJCHighwell
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Re: Suitability of "Hedged" Gold ETFs?

Post by DJCHighwell » Fri Jun 28, 2019 6:34 am

Thanks both for your thoughts which are very much appreciated...what I take from this is that I should select an unhedged fund denominated in GBP.

Thanks again for your input!
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