SPDR Gold ETF (ARCX:GLD), like most gold investment vehicles, is gaining significant investor backing during these turbulent times. Economic expectations are changing daily with the virus. Ultimately leaving investors confused as to whether to play gold for the long term, short term, or even not at all.
Table of contents 1. How does the Gold ETF GLD work? 2. The bigger picture - the current Gold rally. 3. Everything you need to know before investing in GLD
How does GLD work?
Initially, when you think of investing in gold some people think of owning the physical pieces of the metal (bullions) and then selling the commodity in the future. However, not everyone has a warehouse for storing gold, not to mention the storage costs. This is where SPDR Gold trust GLD ETF comes in. GLD owns physical gold and places it in a trust (like a vault), managed by bank HSBC.
At this point, you are probably wondering how GLD tracks the price of gold. The fund aims to track the spot price (the current market price) of Gold sold that investors can easily liquidate. However, GLD cannot track the same price of gold as sometimes the fund will hold cash. SPDR has a tracking error for GLD of 0.89%. Hence, the ETF price is usually slightly different from that of the price of gold.
SPDR GLD and the bigger gold rally picture
The term safe haven in investing is often attributed to the purchase of Gold commodities during a period of economic uncertainty. Over the past 20 years, the Gold price performance has turned over a 583.87% return. This is in comparison to the 162.196% 15-year performance of the SP 500. The SPDR Gold Trust ETF has produced a 299% return since inception 15 years ago, almost doubling the return seen on the US equity indexes.
If we analyse the long-term performance of the SPDR Gold Trust, it paints a historical picture of the economic condition of the United States over the past 15 years. The recent surge in demand for Gold is a resultant off the back of COVID-19, the US election and Chinese tensions continuing to worsen. The uncertainty of the US equity markets is shifting investor confidence and may be a key pre-requisite sign of another equity crash before the end of 2020 (opinion).
Everything you need to know before investing in GLD
Before I begin, I am obliged to remind our viewers that his is not financial advice but rather commentary from extensive research in the field.
The most important aspects of the ETF investors need to understand is cost, risk, and performance.
GLD’s expense ratio is 40 basis points, which means on a $1000 dollar investment, you would 0.04 cents every year. A fee of 40 basis points is relatively cheap when compared to your local gold dealer who will charge a hefty premium. A signifcant risk is that you have to trust GLD have the amount of gold they say they do in the vault. The ETF is audited twice a year, which does provide some transparency.
Investors who bought shares before 2018, might look at GLD and be disappointed with their returns. YIG would agree. Because between 2011 – 2018 equities were on an uncontrolled bull run, which pushed down the value of gold and, ultimately GLD. However, ever since the 2018 GLD’s performance has shown promising signs. The current climate should see GLD post satisfying returns as investors use the ETF as a haven. However, YIG would like to point out that once the market is in a true bull run GLD will plummet. For example ever since 2011, post GFC, we saw GLD depreciate. Therefore, using GLD as a diversifier during these uncertain times is a smart investing strategy (opinion not advice).
Overall, investing in GLD to diversify your portfolio is a smarter way to play it as opposed to chasing after gold gains. Because expectations are constantly changing, which means the perceived value of gold is going up and down.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin, and Tyger Fitzpatrick, Senior Manager, and Founder of YIG.