Inside GLD’s Fall From Grace

by on July 30, 2013 | ETFs Mentioned:

The SPDR Gold Trust (GLD, A-) has long been one of the most popular ETFs in the world. For a brief moment in 2011, it even held the crown for the largest exchange traded product by assets, but quickly relinquished the throne to (SPY, A). Though the fund has yet to turn in a negative annualized performance, it is clear that GLD is no longer the darling that it once was in the ETF world [for more gold ETF news and analysis subscribe to our free newsletter].

GLD’s Rise to Stardom

Debuting in 2004, GLD became one of the easiest and most effective ways for investors to add physical gold exposure to their portfolios. Representing 1/10th the price of an ounce of gold, GLD also made investing in the precious metal more accessible to those who did not have large capital bases, helping the fund propel to stardom.

Right out of the gate, GLD was scooping up assets left and right as it snowballed into one of the biggest ETFs in the world. Gold continued to prey on the need for a safe haven in retail portfolios, and it was left as one of the lone options after the Swiss Franc was pegged to the euro. Below we outline GLD’s net flows for the last five years.

As gold continued to soar in popularity, so too did GLD, watching its net flows rise every year through 2010, when it hit its initial stumble. 2011 may have had net outflows for the fund, but GLD hit its historical highs towards the latter part of the year before beginning its descent. Still, its performance never failed to end the year on a positive note, as evidenced by the chart below:

A clear pattern began in 2011, when GLD hit its peak and saw its first annual net ouflows. From there, the hits just kept on coming.

GLD Flashes Signs of Weakness

GoldMany believed (and still do) that the hefty asset purchasing by the Fed would lead to runaway inflation, causing gold to soar; thus far that prediction has yet to manifest itself. After hitting its peak in 2011, gold plummeted more than 30% to today’s levels, dragging GLD through the mud. 2013, in particular, has been a low point for this once dominant fund, as it has dropped more than 20% and lost nearly $20 billion in total assets. The fund went from the largest ETF by assets to now struggling to hold onto the fifth place position.

Worse yet, as the U.S. economy continues to roar forward and push stocks to never-before seen highs, investors have been quick to exit their gold positions in favor of surging equities. For the time being, GLD has lost its safe haven appeal, as many who have seen their gold positions decimated no longer think of the metal as the go-to safe haven.

Some feel that the 12-year bull run gold displayed was a classic sign of an overbought and overpriced asset class. Others are simply waiting for the metal to find a comfortable bottom, believing its safe haven appeal and use as an inflation hedge will send prices higher in the future. While no one can say for sure where gold will head, it is clear that its recent volatility has wreaked havoc on one of the most popular funds on the market, as GLD is heading for its first annual loss in its history.

Follow me on Twitter @JaredCummans.

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Disclosure: No positions at time of writing.