Beyond GLD: Four Alternative Gold ETFs 19 comments
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When gold bullion cracked the psychologically-important $1,000 per ounce mark earlier this year, most investors expected prices to pause around that level, or perhaps retreat slightly. But gold has continued higher, taking on a near vertical trajectory in recent weeks. Gold traded near $1,125 on Thursday, after setting all-time records in consecutive days earlier in the week.
Gold first cracked the $1,000 mark in the spring of 2008, shortly after the collapse of Bear Stearns, when investors were anxious (with good reason) about the stability of the financial system. Now that these fears have been put (partially) to rest, there is a new set of drivers behind skyrocketing gold prices. Low interest rates relative to the rest of the developed and emerging world have made the dollar an unattractive safe haven, and many major holders of U.S. debt have begun diversifying their reserve holdings into hard currencies. China has been accumulating gold for several months now (while encouraging its citizens to do the same), and India recently bought about $7 billion of gold from the International Monetary Fund.
Given the current environment, some analysts are now anticipating gold prices rising to $1,500 before the end of the year, while others are even more bullish on prices in the intermediate term. The rise of the ETF industry has facilitated investment in gold, and both gold bugs and speculators have embraced gold ETFs in their portfolios. By far the most popular gold ETF is the SPDR Gold Trust (GLD), which has seen cash inflows for 2009 of more than $12.5 billion (through October) and now has total assets of nearly $40 billion. But GLD isn’t the only way for ETF investors to gain exposure to gold prices. Below we highlight four lesser-known ETFs that offer investors various degrees of exposure to gold prices.
PowerShares DB Gold Fund (DGL)
While GLD buys and stores gold bars in secure vaults, DGL tracks a rules-based index composed of futures contracts on gold. Many futures-based exchange-traded products simply roll over their holdings to the next month futures' contracts as the expiration date nears, resulting in a roll yield if the futures markets are in a state of contango (which can be significant in certain environments). The index underlying DGL, however, is an Optimum Yield benchmark maintained by Deutsche Bank, which according to its prospectus means that it is “rolled in a manner which is aimed at potentially maximizing the roll benefits in backwardated markets and minimizing the losses from rolling in contangoed markets.”
Futures-based strategies offer another potential benefit: interest is earned on the underlying assets, partially offsetting management fees or potentially adding to return (although at present, the 3-month T-Bill rate – the relevant rate for DGL – is near zero). As of November 12, DGL and GLD have provided similar year-to-date returns: GLD is up almost 26% while DGL has gained about 24%.
ETFS Physical Swiss Gold Shares (SGOL)
This ETF is similar to GLD in many respects, but differentiates itself in a few key areas. Like GLD (and unlike DGL), SGOL physically buys and holds bars of gold. But unlike GLD, this fund stores its bullion in secure vaults in Switzerland, offering geographic diversification for investors concerned about the security of storing their gold in the U.S.
In 1933, President Roosevelt issued an executive order requiring all U.S. citizens to deliver any gold bullion to the Federal Reserve. Since that time, ownership of bullion has obviously become legal once again, but some investors believe a repeat is possible. Under current federal law, gold bullion can be confiscated by the federal government in times of “national crisis,” the exact definition of which is open to interpretation.
The probability of a confiscation of gold in the U.S. is extremely unlikely. But the last two years have introduced the term “black swan event” to investors’ vocabularies, and many are now cognizant of the potential impact of extreme events, however unlikely, on their portfolio.
Market Vectors Gold Miners ETF (GDX)
For investors hesitant to make an allocation to commodities, GDX offers a way to achieve indirect exposure to gold prices through investments in the stocks of gold miners. This ETF has a global focus, including equities of miners in Canada, the U.S., South Africa, and Australia, among others. In recent months, GDX has served as an effective leveraged play on gold, generally delivering daily returns of two to three times the change in bullion prices.
While gold prices generally have a significant impact on the stocks of gold miners, there are obviously several other factors impacting these firms as well.
Market Vectors Junior Gold Miners ETF (GDXJ)
Earlier this week, Van Eck introduced GDXJ, an ETF focusing on small-cap companies that generate at least 50% of their revenues from gold and silver mining or hold real property that has the potential to produce at least 50% of the company’s revenue from gold and silver mining when developed.
Despite the similarity in names, GDXJ offers a very different risk / return profile compared to GDX. The Junior Miners ETF invests exclusively in companies with a market capitalization of less than $5 billion, while almost all of GDXJ consists of large cap firms. Many of these small cap gold miners are similar to venture capital companies that have yet to generate significant revenues and have negative cash flows.
Disclosure: Author holds no positions in the above-mentioned ETFs at time of writing.
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This article has 19 comments:
I believe GLD stores its gold (or most of it) in London.
Excerpt from the GLD prospectus on page 11:
www.spdrgoldshares.com...
Gold bars allocated to the Trust in connection with the creation of a Basket may not meet the London Good Delivery Standards and, if a Basket is issued against such gold, the Trust may suffer a loss. Neither the Trustee nor the Custodian independently confirms the fineness of the gold bars allocated to the Trust in connection with the creation of a Basket. The gold bars allocated to the Trust by the Custodian may be different from the reported fineness or weight required by the LBMA’s standards for gold bars delivered in settlement of a gold trade, or the London Good Delivery Standards, the standards required by the Trust. If the Trustee nevertheless issues a Basket against such gold, and if the Custodian fails to satisfy its obligation to credit the Trust the amount of any deficiency, the Trust may suffer a loss.
On Nov 16 07:00 AM frdm45 wrote:
> I'm not trying to be alarmist or a conspiracy theorist, just read
> the GLD prospectus and draw your own conclusions about what exactly
> you own and you rights associated with it:
>
> Excerpt from the GLD prospectus on page 11:
> www.spdrgoldshares.com...
>
> Gold bars allocated to the Trust in connection with the creation
> of a Basket may not meet the London Good Delivery Standards and,
> if a Basket is issued against such gold, the Trust may suffer a loss.
> Neither the Trustee nor the Custodian independently confirms the
> fineness of the gold bars allocated to the Trust in connection with
> the creation of a Basket. The gold bars allocated to the Trust by
> the Custodian may be different from the reported fineness or weight
> required by the LBMA’s standards for gold bars delivered in settlement
> of a gold trade, or the London Good Delivery Standards, the standards
> required by the Trust. If the Trustee nevertheless issues a Basket
> against such gold, and if the Custodian fails to satisfy its obligation
> to credit the Trust the amount of any deficiency, the Trust may suffer
> a loss.
If people buy a large volume of GDXJ shares, and they almost certainly will, it will pull up the demand/supply curve for many of these small miners, and share prices of the small miners’s stock will also be pulled upwards. GDXJ share prices should leverage GLD and GDX, all things being equal, and volume of GDXJ shares traded will increase the extent to which the individual small miner stocks leverage the price of gold and leverage the value of the gold miner sector.
In the same way GLD's bullion holdings raise the price of gold when lots of new shares of GLD are bought, an increase in the volume of GDXJ outstanding shares will raise the prices of small miner stocks. I’m betting that will happen in the next week or two, as this new ETF catches on, and it will pull up share prices of the junior miners.
Some of the stocks, like GRS and JAG and NXG, have terrific fundamentals right now, and they should do very well.
CEF: Central Fund of Canada. CEF holds gold and silver, and certificates in a vault. CEF just announced a $1B purchase of gold bullion.
GTU: Central Gold Trust. Like CEF, but holds just gold.
This means that there is a one for one relationship between gold bought by share holders and gold in the vault. It is really there. Check it out.
"while almost all of GDXJ consists of large cap firms" should read
"while almost all of GDX consists of large cap firms"
I can think of one very good reason to invest in GDXJ and NOT GDX. It should be obvious to all.
If you invest in country funds like SA or Oz or other commodity producer/sector ETFs/MFs, you probably already have significant to the major miners!
OTOH, it's very unlikely diversified investors with 10-20 other ETF investments would have any appreciable exposure to the junior miners.
How risky is GDXJ, is the overriding question? I'd suppose that's an aggressive play, perhaps only suitable for long-term investors.
JUNIOR MINERS FOR DIVERSIFICATION, in LONG TERM PORTFOLIOS.
And thanks for the heads up on CEF and the junior minors.
On Nov 17 01:05 AM thisbusiness wrote:
> Downside to CEF is that it can have a premium or discount on the
> shares. Right now for instance, net asset value of US shares is
> $13.09 but they're priced at $14.08, an 8 percent premium.
Need I say more.
On Nov 17 01:05 AM thisbusiness wrote:
> Downside to CEF is that it can have a premium or discount on the
> shares. Right now for instance, net asset value of US shares is
> $13.09 but they're priced at $14.08, an 8 percent premium.
I recommend all GLD holders to sell their GLD and instead buy GTU, which now trades at an unusually low premium around 3.5%. By making this substitution, these investors will be closer to holding actual gold as well as benefit from any return of premium to its typical levels.
Gold bullions ETF from/at the AAA-rated Zurich Cantonalbank:
ZKB Gold ETF USD
ISIN CH0047533549
or:
ZKB Gold ETF CHF
ISIN: CH0024391002
On Nov 16 07:00 AM Roger Knights wrote:
> PS: "But unlike GLD, this fund [SGOL] stores its bullion in secure
> vaults in Switzerland, offering geographic diversification for investors
> concerned about the security of storing their gold in the U.S."<br/>
>
> I believe GLD stores its gold (or most of it) in London.
This is safer than having gold or silver in physical form in your home, and at least as safe as storing it in a safe deposit box.
I do not trust any of the ETFs.
I trust the Central Fund of Canada, particularly since they have nothing to do with the Canadian government.
Can you PLEASE get rid of this IDIOT above selling clothing , tennis shoes + handbags ? PLEASE condsider as it is most annoying ! THANX