A Gold-Hedged Bond ETF Might Offer The Best Of Both Worlds

According to an annual Gallup survey, 26% of Americans now see gold as the best long-term investment, marking a significant increase from last year, when just 15% chose the precious metal. Gold overtook stocks for the second position for the first time since 2014.

Only real estate was more popular with Americans, though real estate’s popularity fell from 45% to 34% over the last twelve months.

Americans’ appetite for gold appears to be growing with gold now becoming the second most popular investment, according to annual survey by Gallup.

American appetite for gold appears to be growing.

Needless to say, this reawakened interest is hardly surprising given the macro catalysts working in gold’s favour. Persistent inflation at home, rumors of a new BRICS gold standard abroad, ever-growing calls for de-dollarization, and wavering faith in the government’s fiscal responsibility have strengthened the case for gold.

And while inflation may finally be cooling, the shifting power dynamics will likely remain in place for the foreseeable future.

Despite record highs, central bank demand for gold shows little sign of slowing down. The current central bank gold-buying cycle started in 2011 and is the longest on record since 1968.

Central bank gold buying reached record highs in 2022, a trend that’s expected to continue in 2023.

Moreover, a growing number of countries, spooked by sanctions on Russian assets, have started repatriating their physical gold reserves.

Some analysts believe that these repatriations could see gold prices rise to $4,000 per ounce. For example, gold holdings at the Bank of England, a main storage centre for official financial institutions, fell 12% from their peak in 2021. Gold has a lot going for it right now.

Yet, in spite of all of this, gold prices are yet to explode.

It’s no secret that the Federal Reserve’s hawkish monetary policy has helped keep gold prices contained. With over $1.6 trillion in US Treasury Bills issued in June 2023 alone, it’s safe to say that high-yielding treasuries are leaving nothing but crumbs for everything else — including gold.

The Federal Reserve has issued $1.6 Trillion in US treasury bills in June 2023 alone.

Nothing lasts forever, however, and the Federal Reserve appears to be closing in on the end of its rate hiking cycle. The stage could finally be set for gold to reach new all-time highs.

That said, retail investors in the US are unlikely to seize the opportunities that a bullish gold market would present. That’s because while Americans may be starting to see gold’s value as a store of value and an investment asset, gold’s opportunity cost makes it prohibitive. Despite all its shine, gold may remain underutilised by retail investors in the United States.

Gold doesn’t generate a regular income like other financial assets, such as dividend stocks and treasuries. Overseas investors may not have the same issues as investors in the US. Unlike in the United States where the government does not issue gold bonds, investors in India are able to purchase sovereign gold bonds (SGBs) from the Reserve Bank of India.

These SGBs are directly linked to the price of gold and earn a guaranteed 2.50% interest rate per annum on the issued price. These bonds typically have a tenure of eight years and offer 100% exposure to gold in addition to providing investors with a reasonable return.

So, what choices do US investors have?

Well, as it turns out, investors in the US aren’t completely out of luck.

Strategy Shares Gold-Hedged Bond ETF (BATS:GLDB) is an innovative fund that aims to combine the power of bonds with that of gold. The fund’s objective is to preserve purchasing power by investing in US dollar-denominated investment-grade corporate bonds while using a gold inflation hedge whose value corresponds to the fund’s bond holdings.

This two-piece strategy tends to work best whenever the price of gold appreciates significantly or when inflation outpaces interest rates. GLDB ETF is both a bond fund that hedges against inflation with gold and a gold fund that pays a yield through its corporate bond holdings.

In a way, it’s probably the next best thing after sovereign gold bonds.

Compared to other gold ETFs like SPDR Gold Trust (NYSEARCA:GLD), GLDB can be a way for retail investors to offset gold’s opportunity cost and maximize their returns through the regular monthly distributions.

The annualised yield currently stands at 3.0%.