Gold ETFs: Where Do They Go From Here?

by on August 3, 2010 | ETFs Mentioned:

Despite global turmoil and continued concern over budget deficits in countries around the world, equity markets soared in July posting double digit gains on the back of solid earnings and easing fears over the situation in Europe. With equity markets jumping again to start August, gold has experienced a bit of a sell of as of late as traders have embraced risky stocks and even bonds due to near-term deflation fears. The yellow metal has seen its value fall from a record of $1,271/oz. down almost $100 an oz. before leveling off at its current level of $1,186. This rapid decline has left many traders wondering if we have seen the top in the gold market and that prices will tumble below the key $1,000 level or if this is only a breather on gold’s march upward to $1,500 an ounce and beyond.

Where Does Gold Go From Here?

It is hard to think of a time in American history where the economic outlook was so uncertain; strong corporate earnings in a variety of sectors have combined with frecent bullish manufacturing readings to leave many confident in an eventual economic recovery. However, the ‘recovery’ has been non-existant for the millions currently without jobs and the hundreds of thousands who have been on unemployment since the recession began in 2008. Furthermore, America’s deficit continues to soar higher into the trillions leaving many ‘gold bugs’ to wonder how long fiat currencies can maintain investor confidence before jumping the ship to gold and silver backed money. Due to these conflicting views, people have lined up in two camps; one believing that gold’s run has just started and the other who believe that the metal will tumble much like oil did in 2008 [also see The Definitive Gold ETF Guide].  

Case for $2,000 Gold

The best case for a soaring gold price comes from weakness in the U.S. dollar. If the euro zone is able to survive this crisis and successfully become a counterweight to the dollar again it could push investors back to the European currency with its higher yields and send the value of dollars lower which would be bullish for many commodities, including gold, which are almost exclusively traded in dollars. Additionally, due to gold’s quick spike up to this level, production has not yet come on line to help balance out the immense demand. “We’ve got no doubts you’ll see spikes up to $1,500 and probably $2,000 over the next few years,” G-Resources Vice Chairman Owen Hegarty said in an interview. “Demand is strong and is only going to get stronger. Constraints on supply have seen production fall in past decade, and the discovery and development of new mines just hasn’t caught up.”

Case for A Collapse In Gold

Meanwhile on the other side of the coin, are those that point to moderating inflation levels and quality earnings, especially out of the banks in Europe as reasons to be optimistic about the future and thus bearish on gold which is seen as a hedge against uncertainty in the markets. The borderline deflation in many developed markets including Japan and the United States greatly decreases the demand for the precious metal and pushes investors towards bonds which generally experience greater demand during these economic conditions. “With inflation risks low, it would now take a major new shock to propel gold prices significantly higher. That said, it is not difficult to think of candidates for just such a shock, including the threat of EMU break-up, renewed doubts about the creditworthiness of a major country such as the US or Japan, and the risk of a trade war between China and the West. But none of these risks are likely to come to a head over the remainder of this year. Accordingly, we continue to expect gold prices to drop back towards $1000/oz by end-2010.”said Julian Jessop of London’s Capital Economics [also see Forget The Inflation/Deflation Debate, The Real Threat Is Biflation].

Ways To Play With ETFs

While there are numerous options available for investors seeking exposure to gold [see all of the options here] we have highlighted four of the most popular long-gold options and two of the most popular short-gold funds below. All of the long-gold funds physically hold the metal in secure vaults which can offer added protection to investors at a low cost. Additionally, this strategy helps to increase liquidity and does away with the large premiums which are inherent in buying gold at a local coin dealer making ETFs a great option for precious metals traders [also read Five Things BusinessWeek Didn't Tell You About Commodity ETFs].

  • SPDR Gold Trust (GLD)- This fund is by far the most popular and most widely traded gold ETF on the market today. The fund has more than $49 billion in assets under management, 16 million in average volume, a level rivaling some of the most popular equity ETFs on the market [see Can GLD Overtake SPY?].
  • iShares COMEX Gold Trust (IAU)- While not as widely traded or held as its SPDR counterpart, this iShares fund offers investors the chance to invest in gold with an expene ratio of just 25 basis points. This represents a huge cut from GLD’s .40% level making IAU an interesting choice for investors seeking to obtain long-term exposure to the precious metal.
  • ETF Securities Physical Swiss Gold Trust (SGOL)- For investors who seek to have their gold in the security of a Swiss vault, SGOL offers a compelling choice. As an added level of security, each physical bar is segregated, individually identified and allocated towards the trust, conforming with the London bullion Market Association’s rules for Good Delivery. 
  • Sprott Physical Gold Trust (PHYS)- For investors who would like to have their gold in a secure place but still outside of the U.S., PHYS offers investors the chance to invest in a fund which holds its gold at the Royal Canadian Mint which is ensured by the Canadian government against losses. The fund also allows investors to exchange their units for physical gold on a monthly basis, a novel concept which may appeal to some traders who do not mind paying the 0.65% expense ratio.
  • ProShares UltraShort Gold Fund (GLL)- This fund seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of gold bullion as measured by the U.S. Dollar fixing price for delivery in London, which may be appropriate for investors who believe that gold’s fall has just begun. The fund is down 19.4% so far in 2010 and it charges an expense ratio of 0.95%.
  • DB Gold Double Short ETN (DZZ)- This fund also offers double the inverse return of gold prices by tracking the performance of certain gold futures contracts plus the returns from investing in 3 month United States Treasury Bills. This technique has allowed the fund to obtain a slightly better return than its ProShares counterpart by posting a loss of just 15.9% on the year while charging lower expenses of just 75 basis points [also see The Definitive Guide To Inverse Gold ETF Investing].

Gold Equity ETFs

Some investors do not like the idea of investing in ETFs holding physical gold, for these investors, the following two ETFs represent funds that invest in companies that mine the precious metal. However, it is important to remember that the price swings of these ETFs are generally more intense than those experienced by the underlying metal [see Soaring Gold Price Boosts Gold Miner ETFs].

  • Market Vectors TR Gold Miners ETF (GDX)- This fund is one of the original precious metal equity ETFs and has built up quite the following with close to $7 billion in assets under management and average daily volume above 11 million. GDX tracks the NYSE Arca Gold Miners Index which provides exposure to publicly traded companies worldwide involved primarily in the mining for gold, representing a diversified blend of small-, mid- and large- capitalization stocks. Primarily, the fund focuses on large and giant cap firms which make up the bulk of the assets in GDX including a 16.2% weighting to Barrick Gold and a 12.1% weighting to Goldcorp. This Market Vectors fund charges an expense ratio of 55 basis points and it is up close to 4% on the year.  
  • Market Vectors Junior Gold Miners ETF (GDXJ)- This fund tracks the Market Vectors Junion Gold Miner Index which provides exposure to a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver. This billion dollar fund primarily consists of international securities which make up close to 90% of the fund’s total assets with the vast majority (68%) going to Canada with Australia trailing with an allocation of just 13%. The fund charges an expense ratio of 0.60% and it is up 3.2% so far in 2010 [see GDX vs. GDXJ: A Better Way To Play Gold?].

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Disclosure: Eric is long gold bullion and IAU.