Markets

Breaking Down The Big Move In Gold ETFs

The move higher in gold ETFs this year may be one for the record books. Through the first four months of 2016, the SPDR Gold Shares ETF (GLD) has gained 21.87% and shown little sign of waning strength. This counter-trend move has likely caught many investors off-guard as a half decade of weakening prices and false rallies led to significant outflows in gold-related ETFs. Nevertheless, that trend may be turning as we see momentum and speculation coalesce into a broader interest in the precious metals space.

Purchasing physical gold as an investment may be a daunting task for many investors who simply wish to participate in the associated price action. To solve that problem, GLD tracks the daily price movement of gold bullion through a trust that buys and sells the physical asset on behalf of its investors. GLD currently has $34 billion in assets and charges an expense ratio of 0.40%.

A 5-year look back at the price of this ETF can provide a measure of perspective for this current rally. While the year-to-date move has been sharp, this fund is still down more than 33% from its 2011 peak.

Gold bugs (or bulls rather) will argue this leaves significant upside relative to many stock and bond indexes, which are currently trading near all-time highs. Conversely, those with a bearish outlook, will likely point to this being a short-term bounce in an oversold asset class.

From a technical standpoint, GLD has been able to maintain a solid trend above its 50-day moving average since the beginning of the year. Furthermore, the recent strength is starting to turn the 200-day moving average higher as well. Both of these indicators will likely need to survive in order to support another extension of the current rally.

According to data from ETF.com, this fund has attracted more than $6.1 billion in new money this year alone. This represents a significant uptick in fresh capital and places GLD as one of the most sought after ETFs of 2016.

Any 20%+ move in an unleveraged exchange-traded fund in so short a time frame will certainly catch the glare of the public spotlight. That is especially true when that move is generated by an asset with a contentious storyline. Gold has been described by some as a “safe haven” or “store of value,” while others decry it as little more than a “pet rock” with few sound investment attributes.

No matter what side of the fence you come down on, there is no denying the demand for tracking this precious metal is highly sought after in the ETF format. The ability to participate in the price action of gold bullion in a low cost and liquid way without having to worry about storing and safeguarding a physical asset is a noteworthy feature of these products.

Over the course of its history, GLD has often experienced outsized moves in relation to central bank policies, currency trends, and even general stock market volatility. The softening of the PowerShares U.S. Dollar Bullish Index Fund (UUP) combined with the early volatility in the SPDR S&P 500 ETF (SPY) may have helped drive money into gold-related ETFs this year as well.

Another needed beneficiary of the move in gold bullion prices has been the publicly traded mining stocks that support this industry. The MarketVectors Gold Miners ETF (GDX) rose an astounding 88.27% through the first four months of 2016 and continues to be one of the strongest sectors of the overall market. This ETF tracks 40 global gold and silver mining companies with over $7.1 billion in total assets.

During the worst of the commodity recession, GDX experienced significantly more selling pressure than gold bullion. It’s no surprise that this ETF has rapidly made up ground on the way higher as well. Gold mining stocks have historically exhibited much greater volatility than their precious metals counterparts.

The Bottom Line

Gold-related ETFs have shone bright in the early stages of 2016 in both relative and absolute terms. Yet despite this strength, there will be many who are skeptical that this strength is sustainable over the long-term and whether these funds are appropriate for a diversified portfolio. Investors considering using these tools should thoroughly understand the benefits and drawbacks of investing in precious metals before they decide to jump headlong into this niche.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Gold ETFs