Why Gold Fund Returns Are Higher Than Gold Price Increases

If Inflation Expectations Are Controlled, Gold Prices Falter
Investing in Gold Mining Company Stocks Becomes More Advantageous

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] Amid rising gold prices this year, gold fund returns have outperformed the returns of physical gold investments. In particular, equity funds investing in gold mining companies posted returns more than twice the rate of gold price increases.

According to financial information provider FnGuide on the 30th, the ‘IBK Gold Mining Securities Investment Trust 1 [Equity] Type A’ fund recorded the highest year-to-date return at 19.05%. This was followed by △Shinhan Gold Securities Investment Trust 1 [Equity] (Type A) at 16.45%, △HiWorld Gold Securities Investment Trust (Equity - Fund of Funds) (UH) (A) at 11.91%, and △KB Star Gold Special Asset Investment Trust (Gold - Derivative) A-E Class at 8.28%.

The fund with the lowest return since the beginning of the year was the ‘Eastspring Gold Rich Special Asset Investment Trust [Gold - Derivative] Class C-E’ at 7.9%, which was still similar to the gold price increase rate (7.2%) during the same period.

Funds with high returns were equity funds investing in gold-related companies. The ‘IBK Gold Mining Securities Investment Trust 1’ and ‘Shinhan Gold Securities Investment Trust 1’ funds invest about 60% of their trust assets in listed companies related to gold mining. They have a high proportion of stocks in well-known gold mining companies such as Newmont and Barrick Gold in the United States. The ‘HiWorld Gold Securities Investment Trust’ is a fund of funds that entrusts money to a fund managed by the global asset management company BlackRock. The master fund also invests in gold mining companies.

During periods of interest rate hikes, funds investing in gold mining companies tend to perform better on average than gold futures indices. This is because gold prices rise when inflation expectations increase (monetary easing and interest rate cuts) and tend to stagnate when inflation expectations decrease (monetary tightening and interest rate hikes).

Despite the Federal Reserve’s (Fed) indication of monetary tightening, gold prices steadily rose recently due to stronger market sentiment that inflation will persist, supported by high inflation indicators in the U.S. However, with interest rate hikes becoming more aggressive this month and the increased possibility of a ‘big step’ (a 50 basis point hike in the benchmark rate at once), gold prices, which had surpassed $2,000 per troy ounce, fell to around $1,937.

[Image source=Yonhap News]

However, gold mining companies, which are evaluated based on profitability, tend to receive higher valuations compared to other industries. Due to this trend, funds or ETFs tracking gold futures indices tend to underperform expectations during periods of interest rate hikes. In fact, most funds with large ETF assets tracking gold futures posted returns below 10%.

Whether or not currency hedging is applied to eliminate exchange rate risk through forward contracts did not significantly affect domestic products. When the KRW/USD exchange rate rises as it does now, funds without currency hedging tend to have higher returns because they can gain additional currency profits when converting dollars to Korean won. It is known that returns of unhedged funds increase by about 2% during a strong dollar period. IBK Mining has a currency hedging ratio of over 80% and is known to adjust the hedging ratio depending on the situation.

This content was produced with the assistance of AI translation services.