In an economy with high uncertainty, locking in on secure investments in hard assets such as gold is one way to preserve financial security and hedge your net worth against inflation. The price of gold may have stabilized since previous decades in which individuals were given a false image of long-term growth prospects for gold by the dramatic short-term spike in the price. However, with increasingly unattractive practice of federal stimulation, the value of the dollar may be shrinking while the value of gold will do merely the opposite, given its nature of negative correlation. iShares Gold Trust (NYSEARCA:IAU) is an exchange traded fund that serves as a low-risk alternative from traditional methods of directly investing in gold or the more common exchange traded fund, SPDR Gold Shares Trust (NYSEARCA:GLD), yet enables investors to gain exposure for a significantly lower initial outlay. This article outlines the unique investment opportunity IAU has to offer.
IAU is an exchange traded fund that attempts to mimic the day-to-day fluctuations in the price of the gold bullion. Below is a price graph illustrating IAU's five year performance.
Figure 1: IAU 5 Year Price Graph from TD Ameritrade
IAU is currently trading between $16 and $17, with the most recent close being $16.67. IAU's total assets equate to $11 billion. IAU's current alpha value is 14, indicating that IAU is undervalued. To help forecast what to expect from IAU over the next few years, I extracted the holding period returns and computed an expected return of 23%, which is what should be anticipated on an annual basis. IAU is relatively low risk and this is revealed through a fund specific beta value of only 0.52. This puts IAU at lower risk than the market, which has a beta value of 1. You will also see below in figure 2 how IAU stacks up to the S&P 500.
Figure 2: IAU vs. S&P 500 Graph from TD Ameritrade
Since 2008, IAU has without a doubt outperformed the S&P 500. In the graph above, the lighter green (top) line represents the returns of IAU in percentage terms and the darker green (bottom) represents the S&P 500.
IAU's Percentage Return Looks Very Familiar
It is clear IAU has outperformed the S&P over the course of the past five years, but what is more interesting is how IAU has performed relative in percentage terms to GLD. For those individuals that closely follow gold and ETFs exposed to precious metals, you may already be familiar with what I am about to reveal in the figure below. Below in figure 3, I have extracted a graph from Google Finance, where I have graphed IAU's performance relative to GLD and the S&P 500 index since 2005.
Figure 3: IAU vs. GLD
The gold line represents the S&P 500 index, and the red line represents GLD. So the question to be answered, where is line for IAU. Well IAU is represented by the blue line, which you may have been already able to tell by the slight shade of blue next to the red line. This indicates IAU and GLD are merely identical, well at least in terms of their relative performance over the past five years. It is hard to ignore the fact that GLD trades at approximately 9.95x the prices of IAU. The primary difference is that GLD is an exchange traded fund that attempts to replicate the value of the gold bullion while, as I previously stated above, IAU attempts to mock the day-to-day fluctuations in the price of the gold bullion. In conclusion, IAU is advantageous for investors because it provides exposure to gold, allowing them to acquire gains that are directly correlated to gold increasing in value, yet does not require quite as high of an initial investment in contrast to other alternatives.
Gold is a hard asset that has been used as a means in exchange for centuries. As a result of inflation, markets reveal a relationship between short-term increases in the price of commodities including precious metals. With increases in supply, the price of commodities such as agriculture crops can be reduced; however, the supply of gold is limited and prices cannot be driven down by supply increases. Therefore, if you account for inflation increasing in the long-run, the price of gold will be forced to increase. Whether you are an investor with a short- or long-term horizon, IAU provides significant exposure to gold for only a fraction of the cost.
Sources: TD Ameritrade, Google Finance, InflationData.com, and The Wall Street Journal.