Gold has long been considered a hedge against inflation and economic uncertainties. In recent years, Gold Exchange-Traded Funds (ETFs) have gained immense popularity among institutional and retail investors. Below is a thorough review of the factors that drive gold prices and the different types of ETFs that provide exposure to gold.
Why Invest in Gold
Gold has recently reached record highs, propelled by geopolitical tensions, economic uncertainties and inflationary pressures. Some analysts anticipate gold prices to strengthen further in 2024, underpinned by safe-haven demand and the market expectation of a rate cutting cycle. Under the current economic climate, the inclusion of gold in your investment strategy can offer unique advantages.
What Drives Gold Prices
Before investing in gold, we should first understand the factors that determined the price trends of gold:
Real interest rates
“Gold is highly correlated to real interest rates,” says Bruce Liegel, a macro fund manager and author of the newsletter Global Macro Playbook. “When real rates are negative, it drives gold higher as negative rates drive the liquidity engine for investment, and eventually inflation. When real rates go positive, it tends to be a braking mechanism for the economy, reducing demand and ultimately lowering inflation.”
Value of the US Dollar
Gold is primarily denominated in US dollars, meaning its value is quoted in terms of the American currency. Dollar-denominated assets generally exhibit an inverse relationship with the US dollar’s value. Consequently, a decline in the dollar's value tends to lead to an increase in the value of gold, and conversely, a rise in the dollar's value may result in a decrease in gold prices.
Read More: Institutionalization of Gold
Demand for gold
As a commodity, gold's price trajectory is also highly influenced by fundamental demand. These demand drivers can be broadly categorized into four primary segments:
(i) Investment Demand
Gold's status as a traditional safe-haven asset attracts investors seeking protection against economic uncertainties, political turmoil, and currency fluctuations. During periods of heightened risk aversion, investors flock towards gold, increasing its demand and pushing up its price.
(ii) Central Bank Demand
Central banks worldwide frequently maintain gold reserves as a strategy to diversify their portfolios and safeguard against external economic shocks.
“Central banks, particularly those of Russia, China and India, have been large purchasers of gold over the last five to 10 years,” says Liegel in his newsletter Global Macro Playbook. “All three of these countries are now part of the BRICS currency that will be backed by gold. As central banks buy gold, it also pushes up the price.”
(iii) Jewelry Demand
Gold's aesthetic appeal and symbolic significance have made it a prized material for jewelry creation for centuries. The continuous demand for gold jewelry, particularly in emerging economies with growing middle classes, serves as a substantial source of demand, influencing gold prices.
Read More: Generational Change in Central Bank Interest Rate Regime
(iv) Industrial Demand
Gold's unique properties, including its malleability, resistance to corrosion, and high electrical conductivity, make it a crucial component in various industrial applications. The demand for gold in electronics, dentistry, and other industrial sectors contributes to its overall demand and price dynamics.
Gold vs Gold Miners ETFs
When considering investments in gold, there are two primary categories of ETFs that offer exposure to gold as an asset class. The first category comprises physical gold ETFs, which track gold prices by holding physical gold bullions. The second category consists of gold miners ETFs, which invest in companies actively involved in gold mining.
Note that historically, gold ETFs have outperformed gold miners ETFs. As explained by Liegel in his newsletter, “The problem with buying gold miners is they have underperformed. GDX, which tracks the major miners, has underperformed gold by about 40% over the last 10 years. And GDXJ, the junior miners, has underperformed gold by over 70%. What's going on in gold is that a lot of the institutional money now can just go buy GLD. In the past, they had to buy individual stocks, but now they want the direct correlation to gold. So they just go buy GLD or another type of gold ETF that tracks the price of gold.”
In addition, here are key differentiators between the two:
Exposure to Price Movements
Gold ETFs: Provide direct exposure to the price of gold. The value of these ETFs closely mirrors the movements in the price of the precious metal.
Gold Miners ETFs: Offer exposure to the performance of gold mining companies. The value of these ETFs depends on the profitability and production levels of the underlying mining companies.
Risk and Volatility
Gold ETFs: Tend to be less volatile than Gold Miners ETFs as they are directly linked to the price of gold.
Gold Miners ETFs: Carry additional risks associated with the operational and financial performance of the mining companies. Factors such as production costs, geopolitical issues, and mining-specific challenges can impact these ETFs.
Market Conditions
Gold ETFs: Perform well in times of economic uncertainty and inflation, acting as a safe-haven asset.
Gold Miners ETFs: May perform differently based on factors affecting the mining industry, such as the cost of production, exploration success, and changes in commodity prices.
List of Gold ETFs
Below is a list of gold and gold miner ETFs that are popular among investors and can be easily traded on stock exchange.
SPDR Gold Shares (GLD)
AUM: $57.5 billion
Expense Ratio: 0.40%
GLD is the largest and most liquid gold ETF, and is the standard for investors seeking direct exposure to the price of the precious metal. The sole asset of the ETF is gold bullion, which is stored in secured vaults. Note that this ETF has a higher expense ratio than other ETFs that own physical gold bullion.
Read More: Review of GLD ETF
iShares Gold Trust (IAU)
AUM: $26.1 billion
Expense Ratio: 0.25%
IAU is another gold-backed ETF that aims to reflect day-to-day movement of the price of gold bullion. The main difference between IAU and GLD lies in their expense ratios, with IAU boosting a slightly lower expense ratio than GLD. On the other hand, the AUM and trading volume of IAU are lower than those of GLD, which could theoretically affect liquidity and bid-ask spread.
Read More: Review of IAU ETF
VanEck Vectors Gold Miners ETF (GDX)
AUM: $801.9 million
Expense Ratio: 0.53%
GDX seeks to replicate the performance of the NYSE Arca Gold Miners Index, providing exposure to gold and silver miners’ stocks. The ETF is a popular investment among investors who want to gain exposure to the gold mining industry. It is a relatively low-cost ETF with an expense ratio of 0.53%. GDX also has a high level of liquidity, with an average daily trading volume of over 20 million shares.
iShares MSCI Global Gold Miners ETF (RING)
AUM: $426.3 million
Expense Ratio: 0.39%
The ETF tracks the MSCI ACWI Select Gold Miners Investable Market Index, offering exposure to companies primarily engaged in the business of gold mining. RING invests in the stocks of gold mining companies around the world, and is a popular investment among investors who want to gain exposure to the global gold mining industry.
VanEck Vectors Junior Gold Miners ETF (GDXJ)
AUM: $387.7 million
Expense Ratio: 0.55%
The ETF tracks the MVIS Global Junior Gold Miners Index, focusing on stocks of small gold miners, some of which are in the early stages of exploration. Typically they have greater sensitivity to underlying gold price movements than more established, senior gold mining companies.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
