The Gold market tends to make a lot of financial headlines during certain market cycles. For example, Gold tends to act as an inflation hedge since it’s a hard asset. During times of rising prices, hard assets such as gold will garner a lot of attention since commodities usually perform better than other asset classes during these cycles. When people go to purchase everyday goods such as groceries, gas, etc., they end up spending more of their earnings than usual. However, having exposure to Gold should, in theory, act like a hedge since its value should keep pace with inflation. Another example over the past year when Gold saw some additional buying was when the stock market experienced heightened volatility during the “Brexit” vote. Below we can see the historical price of gold back to 1970. Finally, and perhaps most importantly, gaining exposure to Gold can help diversify a portfolio away from just traditional equities and bonds.
For a long time the only way to gain exposure to Gold was through physical ownership, futures and options, or specific mining stocks. The risk involved with futures is typically much greater than those of traditional equity markets and is therefore not an ideal vehicle for many investors. The main disadvantage when investing in a specific gold mining stock is that it exposes an investor to single stock risk (e.g., earnings, management changes, etc.). Fortunately, one of the major advantages market participants have today is the ability to gain exposure to thegold marketthrough a number of different products such as ETFs linked to indexes.
In this research piece we will discuss a number of Nasdaq Indexes that provide exposure to thegold market The piece will cover performance over the past year as well as performance thus far in 2017.
NASDAQ EQUITIES-BASED GOLD INDEXES
Equities-based gold indexes typically include companies that are involved in the mining or processing of gold. For example, the Nasdaq OMX Global Gold & Precious Metals Index (QGLD) is designed to track the performance of the largest and most liquid companies engaged in the gold, silver, and other precious metals mining industries. This index had 62 securities as of March 31, 2017, the largest of which were Barrick Gold Corp, Newmont Mining Corp, Gold Corp, and Newcrest Mining Corp. Investors can gain exposure to QGLD through the PowerShares ETF which tracks the index (Nasdaq: PSAU). Also, the Nasdaq Global Indexes family offers ICB subsector indexes, one of which is based on the subsector Gold Mining in the U.S. The Nasdaq U.S. Benchmark Gold Mining Index had four securities as of March 31, 2017. Furthermore, the PHLX Gold/Silver Sector Index (XAU) is a specialized index that tracks 30 securities that are involved in gold and silver mining. Launched in 1979, it is among the first sector indexes to be focused on this market. Market participants can gain exposure to XAU through options traded on the Philadelphia Stock Exchange. As of March 31, 2017, the largest holdings were Barrick Gold and Agnico Eagle Mines. Below is a quick look at performance for the indexes we mentioned when compared to the Gold (Spot) price for the time frame March 31, 2016-March 31, 2017.
As we can see, the past year has been a tale of two stories when comparing the above mentioned Nasdaq Equity-Based Gold Indexes vs. Gold (Spot). The best performing index was the Nasdaq U.S. Benchmark Gold Mining Index, which over the course of the timeframe we are studying was up 26.94%. This was followed by the PHLX Gold/Silver Sector Index (XAU), which was up an impressive 20.52%, and the Nasdaq OMX Global Gold & Previous Metals Index (QGLD), which notched gains of 13.08%. All of these returns compare very favorably to Gold (Spot) price, which was up just 1.33% during the same timeframe. This shows the importance of knowing that individual securities (such as gold mining stocks) that make up an equity-gold based index may not be tightly correlated to certain physical markets like the underlying commodity.
NASDAQ FUTURES-BASED GOLD INDEXES
The Nasdaq Commodity Index Family includes 32 different futures contracts listed in the U.S. or U.K. One of the indexes in the family is the Nasdaq Commodity Gold Index ER, which is based on gold futures contracts traded on the COMEX. The index rolls from one contract to another based on a predetermined schedule, and it very closely and consistently tracks the price of gold over time, as shown in Figure 3. Investors can gain exposure to NQCIGCER through a number of ETPs offered by Boost (A WisdomTree Company), which trades in London. In total there are six ETPs that track the index, some of which provide up to 3x leverage and can allow for both long and short exposure. The ETP tickers are as follows: GLD, 2GOL, 3GOL, 1GOS, 2GOS, and 3GOS.
OPTIONS-BASED GOLD INDEXES
ETFs have become a very popular vehicle for gaining exposure to gold. To mitigate some of the risk associated with that exposure, the Credit Suisse Nasdaq Gold FLOWS 103 Total Return Index (QGLDITR) was designed to track a portfolio consisting of a long position in SPDR Gold Shares (GLD), which is the largest and most liquid of the gold ETFs, and a monthly rolling short position in call options against that same ETF. This indexed “buy-write” approach typically results in lower volatility than GLD itself, and converts some of the option premium into a payout stream. Investors can gain exposure to the QGLDITR Index through the Credit Suisse ETN, which tracks it (Nasdaq: GLDI). The below graphic displays one of the added benefits and unique characteristics of QGLDITR and its ability to generate a consistent income stream of dividend yields all while gaining exposure to Gold.
As can be seen in the following graph, over the last year, while QGLDITR has underperformed at certain points over the course of the year, cumulatively, the index has outperformed the price of gold over the last year with very high correlation.
PERFORMANCE FIGURES: December 30, 2016-March 31, 2017
Before we conclude, let’s take a look at how some of the indexes we’ve been discussing are performing thus far in 2017. What is interesting to note is that there has certainly been some mean reversion in the market with NQUSB177 down 1.31% on a YTD basis. On the flip side, both the gold spot price (+8.86%) and QGLD (+8.54%) are performing quite well thus far in 2017. XAU is also in positive territory, up 6.22%. QGLDITR, which is the covered call strategy, is also off to a strong start gaining 8.07% on the year.
CONCLUSION
Given the recent six-month highs in the price of gold, this piece is evermore topical. The introduction about thegold marketand a few examples of times when hard assets typically outperform traditional asset classes like stocks and bonds should help investors better understand if and when they should consider including gold in their portfolio. Historically, gold and other hard assets have helped diversify a portfolio and minimize downside risk when global equity markets experienced heightened volatility and drawdowns. Nasdaq offers a number of different methods to access gold – through equities, futures and options-based indexes. Each of these index types has some sort of product tied to them as referenced above. On a year-to-date basis, some of the best performing products have been equity-based, though the options-based buy-write strategy is right in the mix and the added benefit of a consistent income stream should certainly justify investors giving the investment a closer look for their gold exposure.
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