Tag Archives: IAU

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.

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%.

It Takes Two (Months) to Contango

Caveat emptor.

It’s Latin for buyer beware. There’s no doubt that a lot of people in this world want to make money off of selling you junk. In fact, that’s a pretty good assessment of the entire collateral debt obligation market. If buyers had paid a little bit more attention to what they were buying, we might not be in the financial mess destroying the country.

ETF companies aren’t selling junk, but investors still need to be aware of what they’re buying. Many ETFs are extremely sophisticated instruments. Investors may think they are buying one thing, when in fact they are buying another. The problem isn’t with the ETFs. These transparent instruments lay it all out in the prospectus and usually in the easy-to-read fact sheet on their Web sites. The problem is investors need to do their homework.

For example, Tradefast, an independent equity trader at a private investment fund, writes on the MarketFolly blog about how contango affects the crude oil ETFs. He says “three factors play a role in determining the performance of the United States Oil Fund (USO): 1) changes in the spot price of crude oil, 2) interest income on un-invested cash, and 3) the ‘roll yield’.”

Unlike the two gold ETFs, the StreetTracks Gold Trust (GLD) and iShares COMEX Gold Trust (IAU), which actually hold gold bullion, USO doesn’t hold the underlying commodity, barrels of oil. It owns oil futures contracts.

While the spot price of crude oil, the price it costs to buy a barrel of oil today for immediate delivery, may affect how investors buy or sell this exchange-traded vehicle, USO doesn’t track the spot price. It holds holds the front month futures contract, which is where oil traders expect the price of oil to sell for a month from now.

So, while the spot price will influence where investors expect the price of oil to be a month from now, they don’t necessarily move together. For example on Friday, anticipation that passage the economic stimulus package going through Congress would increase demand for oil, the price of the March crude futures contract for West Texas Intermediate crude oil jumped $3.53, or 10.4%, to $37.51 a barrel on the New York Mercantile Exchange. Meanwhile, the spot price closed Friday with a bid/ask spread of $37.60 to $37.65, according to the Australian Associated Press.

USO investors hoping to capture the spot market’s Friday gain were surprised to see the ETP actually fall 1.2%. That’s because the previous Friday the fund had rolled out of the March contract and bought the April contract to avoid taking delivery of the actual oil this Friday. So, while the March contract jumped 10%, the NYMEX April crude contract fell 0.47% to $41.97.

It’s the forward roll from the first month contract (March) to the second, and future first, month contract (April) that upsets MarketFolly. When the price of oil is rising, it’s in a trend called “contango”. This means that demand for oil in the future is greater than today, or that future supplies will be tighter. So, when you sell the first month contract, you have to pay up to buy the next month’s contract. It’s not a straight line up like in a stock. If you sell the March contract at $37.50 and buy the April at $41.97, you have to pay an additional $4.47 per contract. This additional cost eats into returns. Well, with a little bit of research, such as reading this story I wrote for SmartMoney.com when USO launched three years ago, he wouldn’t have been so surprised.

MarketFolly then realizes that “USO is not a direct play on the spot price of crude oil – it is, instead, a play on the spot price, forward prices, and the relationship between spot and forward (the slop of the futures curve).”

Because of this he says that USO is not a good way for investors to play the price of oil. For some reason, the FT Alphaville blog from the Financial Times agrees with this ridiculous assertion. Since investors can’t buy the spot price of oil without taking delivery, you have to buy futures to make any kind of play on the price of oil. So, all investors pay the roll, not just USO. If investors were buying futures and not the ETP they would have to make the same kind of trades USO makes, pay the same cost of the forward roll, plus the transaction costs.

What Tradefast fails to realize is “being in contango doesn’t means you lose money,” says John Hyland, the portfolio manager of USO. “Being in contango means you underperform the spot price. If the price of oil rises $100 again, even in a contango market you still make money. You just make less that the return in spot, say $90. They just focused on one half of the equation.”

Hyland says in the reverse scenario, backwardation, when the price of oil in the second future month is lower than the near month contract, the investor would outperform the spot price, but that doesn’t mean you make money. “Spot can fall 50% and you fall 40%. So you outperformed the spot price, but you still lost money.”

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.