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Six ways to profit from rising gold price

The Australian dollar gold price hit a record high in October as the safe-haven metal and inflation hedge climbs on fears around war in the Middle East and a global economy carrying record levels of debt.

Since fetching $2585 an ounce this time last year, Australian dollar gold has jumped 22.2 per cent to $3158 an ounce on October 31 to thump the 1.2 per cent fall for the S&P/ASX 200 index over the equivalent period.

Katana’s Romano Sala Tenna named three listed gold plays he’s backing to profit from the metal’s ascent.  AFR

The precious metal’s gains in October helped it top $US2000 an ounce on Monday, despite a surge in US 10-year bond yields, which topped 5 per cent this month for the first time since July 2007.  Gold is traded in US dollars and traditionally rises in price as bond yields and the US dollar fall, as this makes it more attractive to investors.

“Gold rose on Middle East tensions as investors fear higher oil prices equal higher inflation,” says BetaShares chief economist David Bassanese. “It’s also interesting that gold has rallied even though bond yields surged. Usually Middle East tension is a flight to safety into bonds, but this tension is a potential new inflation shock and the flight’s been out of equities into gold.”

“Gold is the classic safe-haven asset,” says Shane Oliver, chief economist at AMP. “It’s really that demand pushing it up. There are also more signs the Fed is close to the top on interest rates – if the Fed delivers some sort of easing and a declining US dollar next year, that’s positive for gold as well.

Other investors – including Romano Sala Tenna, a portfolio manager at Katana Asset Management – argue the US government’s intention to spend more than it earns in tax revenues over the years ahead will prove inflationary and increase gold’s appeal.

According to US government forecasts, the nation’s fiscal deficit as a percentage of gross domestic product is expected to widen to 6.1 per cent in both 2024 and 2025. Total debt of $US32.9 trillion as at August 2023 is significantly higher than total GDP of $25.4 trillion in 2022, according to the World Bank.

“I suspect it’s because of these deficits that people are starting to connect the dots and don’t want to hold US dollars so much when they’re devaluing the currency,” says Sala Tenna.

“The one thing that’s hindered gold is bond yields at 5 per cent because you do have a real opportunity cost holding gold now – nonetheless the bigger piece playing out for gold is US fiscal policy.”

ASX options for exposure

Investors who want exposure to gold have multiple options, including buying gold miners listed on the ASX.

Perth-based Sala Tenna says Katana likes three ASX-listed gold plays that carry varying risk.

De Grey Mining: In the speculative space, he cites developer De Grey Mining as a buy. It owns the Hemi mine, expected to become the third-largest mine in Australia producing 530,000 ounces of gold a year from a giant estimated resource of 9.5 million tonnes.

De Grey is also touted as a takeover target, with ASX-listed Gold Road Resources owning 19.9 per cent.

“We love De Grey,” says Sala Tenna. “We don’t see how it doesn’t get taken out at some point. It’s a top three gold project in the world by size and it’s in the Pilbara in Western Australia, so it’s really the perfect place to have a huge project.”

Regis Resources: Among the lower-risk, large-cap producers, the fund manager says Regis Resources is his preferred pick. It’s the ASX’s third-largest domestic producer, and trades at a cheaper valuation than the two largest producers, Northern Star and Evolution Mining.

“Regis’ biggest issue has been its [foreign exchange] hedging book,” says Sala Tenna. “But this book rolls off at the end of this financial year and it’ll pick up $150 million in earnings just from that.”

Tietto Minerals: Sala Tenna says investors prepared to take more risk to chase higher returns among mid-cap producers could look to Cote D’Ivoire-based Tietto. It’s targeting a minimum 170,000 ounces a year of production from a West African project over the next nine years.

“It’s in the emerging space, so we say caveat emptor, buyer beware,” says Sala Tenna. “You’re taking on more risk here, so you need to know what you’re doing, but we like it and Cote D’Ivoire is one of the best places in Africa to operate.”

ETF choices

Investors who don’t want to worry about the risk of capital losses by owning shares in gold miners exposed to production and other operating risks could buy an exchange-traded fund (ETF) that tracks the US dollar gold price.

BetaShares’ Gold Bullion ETF tracks the benchmark gold price in US dollars. The ETF charges a management fee of 0.59 per cent per year and is currency hedged to mean an investor’s returns in Australian dollars are unaffected by exchange rate movements between US and Australian dollars.

“If you think the Australian dollar’s going to weaken and gold’s going to strengthen, you could get unhedged exposure, but you need that dual bet to win,” says Bassanese. “Generally, when gold is strong, it’s part of a broader commodity move and typically the Aussie dollar strengthens then. So you won’t do as well if you own an unhedged gold ETF.”

VanEck Gold Miners ETF offers diversified exposure to the performance of gold miners outside Australia. The management fee is 0.53 per cent per annum. It tracks a basket of 52 international gold miners with market capitalisations of more than $750 million and has returned a compound 10.2 per cent a year for the past five years.

The real deal

Physical gold: Finally, investors could take matters into their own hands – literally – by buying physical gold from a registered bullion dealer. A standard gold bar weighing an ounce and worth a foreign exchange-adjusted $3170 on October 30 is typically just 4.2 centimetres long and 2.4 centimetres wide.