Want to invest in gold? Skip mining stocks, strategist says, and trade this instead

Published Mon, Apr 17 20231:20 AM EDT

After an underwhelming six months, gold is seeing renewed interest as several factors align in its favor, according to Catherine Doyle, an investment specialist at London-based Newton Investment Management. Gold prices are up 12% this year and are now trading at $2049 per troy ounce on the New York spot price market. However, the precious metal was flat in 2022 despite inflation running at a double-digit percentage. @GC.1 1Y line For Doyle, gold's prospects have improved due to its close relationship with real interest rates. Gold prices typically surge if markets expect low interest rates in a high inflationary environment. "It also does look like the interest rate path will be shallower than previously anticipated because economies are just too fragile to bear materially high rates for long period," Doyle told CNBC's "Squawk Box Europe" Friday. Interest rate traders have priced in a 75% chance of a rate cut by the U.S. Federal Reserve by Nov. 1 this year, according to the CME FedWatch Tool . This is despite Fed forecasts that inflation will remain above the 2% target at 3.6% this year. Doyle also mentioned that gold's performance could benefit from increased buying by sovereign wealth funds, particularly in emerging markets like China. Central banks, labeled as "official" buyers in the trade, were also big buyers of gold in 2022 accounting for 23% of total demand, according to investment bank UBS. It marked the thirteenth consecutive year of net purchases and the highest level of annual demand on record dating back to 1950. "We also see official sector demand remaining strong for at least another year, with select central banks determined to diversify their reserves away from US dollars and US government bonds. In a historical context, central bank purchases tend to be less sensitive to prices," UBS' precious metal strategists led by Wayne Gordon said in a note to clients on Apr. 4. UBS' Gordon also echoes Doyle's outlook, as spot gold prices recently broke through the $2,000 per ounce barrier following the banking turmoil in March. The strategist expects gold prices to reach $2,200 per ounce over the next 12 months. How to trade gold Doyle's preferred method for gaining exposure to gold is through exchange-traded commodities (ETCs), which are backed by physical gold. Unlike exchange-traded funds which invest in a variety of stocks, ETCs allow investors to focus on a single commodity. ETCs are structured as notes, which are debt instruments underwritten by a bank for the issuer and backed by the commodities they track as collateral. They can be volatile investments as they are linked to a commodity's price. However, ETCs avoid some of the potential pitfalls of investing in stocks, according to Doyle. "We have on occasions had exposure to gold miners, but what we find is ... often you get some noise around the mining exposure through perhaps weak management or poor decisions," continued Doyle. "And that can just create additional noise that we don't really want." A number of ETCs for gold exist, such as the iShares Physical Gold ETC , Invesco Physical Gold , WisdomTree Core Physical Gold , Xtrackers Physical Gold ETC , and Xetra-Gold . Gold has been a strategic holding in Newton's Real Return strategy for over a decade as it offers protection against various risks and can act as an "insurance policy in times of credit stress," Doyle said, such as the recent banking sector turbulence.