ETFs That Track Gold Having A Better Year Than The Stock Market

fter a midsummer rally, gold is now having a better year than the S&P 500 index. And that’s good timing for some new gold ETFs that launched this year.

SPDR Gold Shares (GLD), the largest and oldest ETF in the world which tracks the price of gold, has surged more than 10% since July 7 for a year-to-date return of 16.9% through Sept. 7, according to Morningstar Direct. Meanwhile, SPDR S&P 500 (SPY), which tracks the stock market benchmark, is up 11.5% this year. IShares Gold Trust (IAU), GLD’s main competitor, is also up nearly 17%.

The main reason for the rally is the falling U.S. dollar, which has dropped nearly 10% this year. Some blame comments from President Trump, who said in April that the dollar was “getting too strong.”

But others think it has more to do with interest rates.

“Real interest rates started to go negative and that hurts the dollar. Both the five-year and the two-year (Treasury notes) are now negative,” said Frank Holmes, CEO and Chief Investment Officer of U.S. Global Investors, which launched U.S. Global Go Gold & Precious Metal Miners (GOAU) in June. “When the dollar falls, gold goes up.”

GOAU holds companies engaged in the production of precious metals either through mining or production and specialized financial firms called royalty companies. These royalty companies provide capital to fund exploration and production projects, and in return, receive a stream of royalties. GOAU is up 14% since its launch. It carries an expense ratio of 0.60%.

GraniteShares Gold Trust (BAR) also launched this year, on Aug. 31. Just like GLD and IAU, it holds actual gold bars to track the price of gold. Founded by Will Rhind, who managed GLD for 2-1/2 years before starting GraniteShares, BAR’s big selling point is it’s the lowest-cost gold ETF. It charges an expense ratio of 0.20%, vs. 0.40% for GLD and 0.25% for IAU.

“When you own gold as a hedge, you want the lowest-cost hedge,” said Rhind.

People flock to gold as a hedge when there’s uncertainty in the market. And there had been a lot of uncertainty lately, including deadlines to keep the government funded and raise the debt ceiling.

The Senate on Thursday approved a bill to avert a government shutdown and raise the debt ceiling for three months, as well as $15.25 billion in hurricane relief aid. In August, the president had said he was willing to risk shutting down the government unless he obtained funding for the wall he promised to build between Mexico and the U.S.

Gold hit its all-time high of $1,900 in 2011, during the last government shutdown threat.

“Another key motivation is we’re entering crash season, September and October,” said Brandon White, gold analyst at Bullion Management Group in Toronto. “We haven’t had a (stock market) correction for a number of years. So, people think we may be due for a downturn. So, take money off the table and move it into something that does well in market downturns, and precious metals do well.”

He added that annual gold production is expected to decline 40% going into 2018.

Then there is the saber rattling between Trump and North Korea, which is testing nuclear bombs and firing missiles. Wars always make gold prices go higher and geopolitical tensions are rising between the two countries.

All this has pushed the price of gold through the technical resistance line of $1,300, to $1,349 an ounce.

“A lot of people watching gold have been waiting for gold to challenge the $1,300-resistance line. It was tested three times last week,” said White. “When money managers consider an asset to revert to the upside from a downtrend, they will often wait for a 20% move. The resistance line was a key technical indicator that needed to be broken before sentiment turned. Now interest is back. It’s not so much a speculative trade as a defensive trade.”

And interest is definitely back.

Gold-backed ETFs saw net inflow of $1.6 billion in August, according to the World Gold Council. North American ETFs drove global inflow. GLD led inflow with $1.03 billion, or 3.2% of its assets under management, and IAU received $266 million, or $3.1% of AUM.

Advertisement

Gold Could Rally If We Go Over Fiscal Cliff

Gold is definitely not in a bubble, said Nicholas Brooks, ETF Securities’ head of research and investment strategy, recently. The yellow metal hasn’t experienced the typical exponential rise seen in the run up to the collapse of previous asset price bubbles. As long as countries have to tackle economic problems over the next year, Brooks predicts the price of gold will do well.

“Gold could rally if we go over the fiscal cliff,” said Brooks at the ETF Securities Annual Precious Metals Conference in New York. “There seems to be a growing view that gold may be one of the better hedges against the risk that a policy mistake is made and we go off the fiscal cliff.”

The fiscal cliff is the name given to the dramatic spending cuts across the federal budget that will go into effect January 1, 2013. This is the same day Bush era tax cuts expire, causing tax across the board to increase to the rates seen during the Clinton Administration. The big fear is that spending cuts and higher taxes will hurt the economy so much the U.S. will fall back into a recession. This could also spark another downgrade of U.S. debt by the debt rating agencies. While not good for the economy, such a situation would be good for the price of gold, he said.

Brooks said structural factors continue to support the gold price, especially behavioral changes among the world’s central banks. Prior to the second quarter of 2009, central banks were large net sellers of gold, selling between 10% and 15% of their supply. But in 2009 they became net buyers. Now between 10% and 15% of the annual supply of gold is being bought by central banks, a switch of 30 percentage points which is a net positive for the precious metal, he said.

He also pointed to central banks around the world, including the U.S. Federal Reserve, saying they will continue to increase liquidity until their economies recover.

“Low real interest rates and a decline in the real return on cash are enormously good for gold,” said Brooks. And if later in the year, “European sovereign risk concerns rise again, a relatively high probability scenario, the gold price has the potential to rally strongly, as it did last summer when Spain saw its bond yields rise sharply on growing fears it would not be able to finance its debt payments.”

The British-based ETF Securities says it launched the first exchange-traded commodity (ETC) in the world when it listed the Gold Bullion Securities in Australia and London in 2003. When the SPDR Gold Shares (GLD) launched in 2004, it was the first U.S.-listed ETC. Today, GLD, with $73.5 billion in assets, is one of the largest ETP’s in the world.

ETF Securities manages seven precious metal exchange-traded products in the U.S. The ETFS Physical Swiss Gold Shares (SGOL) and the ETFS Physical Asian Gold Shares (AGOL) each charge an expense ratio of 0.39%, one basis point less than the SPDR Gold Shares. ETF Securities’ other products track silver, platinum and palladium.

Recent Sell-Off Sets Up Next Gold Rally

When the price of gold plunged 20% last month, many market watchers declared the gold boom over. Stalled, yes; ended, no, according to many gold analysts, who believe the precious metal may instead be near a new sustained rally.

“I can tell investors don’t sell off your gold,” says Martin Murenbeeld, the chief economist at DundeeWealth. “We’re at a crossroads here.”

During the summer, gold surged 29 percent to a record high of $1,920 a troy ounce. This jump caused the price to drastically detach from its 200-day moving average, an important trend line in technical analysis that the gold price had closely hugged for much of the last decade. Technical analysts considered this jump unsustainable and in September gold gave back most of these gains.

Gold fell to a low of $1,534.49, much to the technicians delight, and it bounced off the 200-day moving average’s support level of $1,527. While most gold watchers expect the metal to experience turbulence during the next few months, the world hasn’t changed much, and gold prices may climb higher because of its status as a safe-haven during turbulent times.

“Have the countries around the world solved the debt crisis?” asks Nick Barisheff, president of Bullion Management Group, a precious metals investment company based in Toronto. “Have the bailouts ended? Have their currencies stopped tanking?“ With the world already worried about Greece’s fiscal problems, gold summer’s rally was sparked by fears that the U.S. might default on its debt.

After Standard & Poor’s downgraded the U.S. debt, investors flocked to gold as one of the few safe havens left. This raised the specter of recession, which is never good for gold. The combination of increased collateral requirements for trading with falling commodity and stock markets, gold tumbled as investors sold it for liquidity amidst a flurry of margin calls.

Still many analysts think the gold market isn’t in a bubble and that the run-up is far from over. Analysts say a bubble is when an asset goes up exponentially 15 to 20 times.

Gold is up seven times during the last decade. Since its low on Sept.26, 2011, gold has jumped 9 percent. Most analysts expect the price to retest September’s low during the next few months. If it bounces again that would be the buy signal.

Ed Carlson, Chief Market Technician at Seattle Technical Advisors.com says gold could fall as far at $1,460. But even Carlson predicts a new sustained advance will begin after Thanksgiving.

The fundamental factors for being bullish are also compelling. Low interest rates are very good for gold. In August, the Federal Reserve promised to keep rates low for the next two years. Additionally, most analysts expect the European Central Bank (ECB) to stem the European debt crisis with a flood of new money.

For the full story go to Reuters Money.

Full disclosure, I own shares of the SPDR Gold Shares (GLD) in my IRA. You should too.

The Best Gold ETF to Buy

The radio interview went well, but the host threw me a curve ball by asking me about my Tech Titans story instead of the Best ETFs. In that story I look at which is the best to buy, Microsoft, Apple or Google. Then we got into a debate about mutual funds vs. ETFs. Anyone reading this blog, should figure out where I stand. But for those who don’t, I think ETFs are the mutual funds of the 21st Century. And if that’s the case, why would you want to be so 20th Century? 😉

Also in Kiplinger’s Best of 2010 I picked another ETF, only it was under the heading of the Best Way to Buy Gold. I think the best way to own the shiny stuff is in a low-cost fund. Unless you think we’ll be using gold coins as currency, invest in iShares Gold Trust ETF (IAU), which holds gold bullion. Ease of trading, high liquidity and low commissions make this a better choice than coins. It recently became the cheapest gold ETF by cutting its expense ratio to 0.25%.

New ETFs Track Global Silver, Copper Stocks

Global X launched two new commodity ETFs on the NYSE Arca today.

The Global X Silver Miners ETF (SIL) is the first ETF to focus on silver mining companies. The iShares Silver Trust (SLV), which launched in 2006, holds the actual physical commodity silver in its fund. The new Global X ETF tracks the Solactive Global Silver Miners Index, a market capitalization-weighted index holding the equities of the largest and most liquid silver mining companies in the world.

“At the beginning of a bull market, it is well documented that mining shares typically rise, and often outperform bullion,” said Nick Barisheff, President of Bullion Management Group Inc., in a written statement. It is true that both gold and silver stocks provide leverage over the price of the actual metal, and hence, more profit potential. Of course, leverage can cut both ways. It increases losses too.

The majority of the ETF’s holdings are Canadian-based companies, but companies in the U.S., Mexico, Peru, and Russia are also represented. As of March 31, the largest index components were Fresnillo, Industrias Penoles, Silver Wheaton, and Pan American Silver. Unlike gold, silver is both an investment asset and offers industrial and consumer applications. According to BMO Capital Markets, 54% of silver demand is industrial and that demand is expected to rise 19% this year. Global X quotes commodities analysts saying silver demand should remain strong as a result of both investment interest and increased use in the consumer and industrial sectors.

The Global X Copper Miners ETF (COPX) follows the Solactive Global Copper Miners Index, a market capitalization-weighted index containing stocks from the largest and most liquid copper mining companies in the world. Most of the companies in the fund are based in Canada, Australia, the United Kingdom, U.S. Mexico, China, Poland, Switzerland, and South Africa. As of March 31, the largest index components were Freeport-McMoran, Xstrata, Grupo Mexico, and Southern Copper. According to a 2009 study by CIBC World Markets governments are expected to spend approximately $30 trillion on infrastructure projects over the next 20 years, with copper being a large component of the materials used in infrastructure. China is currently the world’s largest consumer of copper. Barclays Equity Research predicts China will use 15.6 billion pounds of copper each year by 2015. Both funds have an expense ratio of 0.65%.

Pressure on Gold May be Buying Opportunity

The Goldman story is affecting gold according to 24/7 Wall Street. On Friday, the SPDR Gold Shares (GLD) lost 2.1% to $111.24. The guys at 24/7 reason that the Paulson & Co. hedge fund implicated in the scandal is heavily invested in gold. However, if investors pull out, the fund may need to sell gold to cash them out, putting downward pressure on the yellow metal. I think this is argument is a nonstarter. Most hedge funds require 60 to 90 days notice before investors can cash out. So, this sell off won’t happen for a while. This means, that gold may have been beaten down without good reason, and that Monday is a buying opportunity.

Meanwhile, The New York Times said on Saturday that Wall Street firms tent to settle cases like this one, but Goldman’s statement on Friday that it intends to fight may create a big problem. While the refusal to settle was intended to discourage investor lawsuits, this could set Goldman up for a long, messy public battle. The paper added that several European banks that lost money in the deal may try to recoup the money from Goldman.

Then Sunday, the Times added two congressmen want a deeper investigation into taxpayer losses while Britain’s prime minister asked his country’s securities regulator to investigate the Goldman due to losses incurred by the Royal Bank of Scotland. Germany added it may take legal action as well.

It appears Yahoo!Finance had it wrong. They didn’t even mention the volume of the Financial Select Sector SPDR (XLF) which was the third most traded stock on Friday with 380.6 million shares traded, topping the SPDR (SPY) and Direxion Daily Financial Bear 3x (FAZ), which it said had the third highest volume. On Friday, XLF fell 3.7% to $16.36 and the ProShares Ultra Financials (UYG), the one that gives 2x the positive return on the financial sector, lost 6.6% to $71.65.

Einhorn Makes Gold His Largest Holding

Fresco passed along this little tidbit reported by StreetInsider.com. David Einhorn’s Greenlight Capital hedge fund issued its 13F for the quarter ended 3/31/09. Fearing inflation, Greenlight boosted its exposure to gold through two ETFs. The fund bought 514,000 shares of SPDR Gold Shares (GLD) to raise its stake to 4.2 million shares. StreetInsider says this is Greenlight’s biggest position and valued at $385 million. The fund maintains its stake of 3.2 million shares in Market Vectors Gold Miners ETF (GDX). For a full report on Greenlight’s stock holdings check out StreetInsider.com.

Inflation has to go up, no? I mean really, it can’t get much lower. Gold is considered a classic hedge against inflation, so if people anticipate inflation rising significantly, gold is a good place to be.

The Wall Street Journal says GLD is seeing the largest money flows for buying on weakness. Today, GLD is down $1.39, or 1.5% to $90.17.

All That Glitters Is Not Gold

In times of economic crisis, investors and regular citizens scared-out-of-their-minds turn to gold. As a gift, I like to say it’s always the right size and the right color. But as an investment, it’s an asset that is supposed to hold a steady value. While demand for gold can push the precious metal’s price higher, it’s value can also rise on a relative basis. Specifically, as the dollar continues to fall in value, it takes more of them to buy the same ounce of gold. So, if you think the stimulus plan might devalue the U.S. dollar and you don’t know where to invest, it may be a good time for gold.

With gold up year-to-date 4.97% as of Feb. 6, compared with 4.32% for all of 2008, ETFGuide compares the 2008 returns of four exchange-traded vehicles (ETVs).

SPDR Gold Trust (GLD) up 2.99%
Market Vectors Gold Miners ETF (GDX) down 26.65%
PowerShares DB Commodity Index Tracking Fund (DBC) down 30.77%
ProShares Ultra Gold (UGL) n/a, launched in Dec. 2008

I look at three more.

iShares Comex Gold Trust (IAU)
PowerShare DB Gold Fund
PowerShares DB Precious Metals Fund

The Gold Trust, up 4.92% this year through Feb 6., did the best because it holds real, solid gold bricks in a vault in London. If you want to own gold and not have to store it, this is the way to go. This or iShares Comex Gold Trust (IAU), which is up 5.11% as of Friday. These are not true funds, but grantor trusts. Shareholders are taxed as if they own the underlying gold, with a long-term gain tax rate of 28%.

The Market Vectors Gold Miners is an ETF that holds stocks. So, even though the commodity gold went up, the stocks fell because they were caught up in the macro downtrend of the broader stock market. The S&P 500 lost about 38% last year, so the rising price of gold helped the ETF’s returns, still beating the S&P 500 by 11 percentage points doesn’t feel so good when you lost 27% of your investment. Gold stocks will give leverage over the commodity, up to three times the percentage gain in the price of gold, but that leverage also works on the way down. Year-to-date Gold Miners is down 26% according to Yahoo Finance. Because Market Vectors holds stocks the current long-term capital gain tax rate of 15% applies.

PowerShares DBC holds futures contracts, but only about 10% is comprised of gold contracts, so it’s not a pure play. But it is a good way to play the broader commodity sector by tracking an index. Obviously, 2008 wasn’t a great year for commodities either. DBC is taxed like futures contracts. Capital gains are taxed 60% at the long-term rate and 40% at the short term rate.

ETFGuide doesn’t look at PowerShare DB Gold Fund (DGL), which holds only gold futures contracts. The DGL rose 3.2% last year and is up 2.61% year-to-date. There’s also the PowerShares DB Precious Metals Fund (DBP), which is comprised of 80% gold and 20% silver. It slid 1.12% last year and is down 3% year-to-date.

The price of one ounce of gold closed at $895 on the London Bullion Market, down from $920 last Thursday.

For a detailed explanation of the gold and all the other ETV tracking commodities check out ETFs for the Long Run: Chapter 8: The ETFs That Aren’t ETFs.