Engines Revving? A Look Under-The-Hood Of 5 Metals ETFs

|
Includes: GDX, GLD, GLL, GOLD, IAU, SIL, SLV, TLT, UGL
by: Investment Underground

by Ann McQueen

Uncertain global economy. Europe’s debt crisis. Downgraded U.S. debt. Weakening dollar. Inflation. Gloom. Doom. Fear. These factors have formed a perfect storm that has sent investors running for shelter in gold and silver. World economic conditions, U.S. Federal Reserve Board decisions, increased demand, and other factors are driving precious metals to historic high prices. A number of exchange traded funds have emerged that seek to replicate gold and silver prices. They do so by buying bullion outright, by ­­­­­­­­­­­investing in options, futures and swap agreements, or by purchasing shares of publicly traded mining companies in the indices whose performance they attempt to replicate.

I examine several of these ETFs to analyze what they do and how they are performing, but first, a snapshot of 20-year gold and silver price trends may help.

The price of gold has remained fairly stable from 1991 into 2003, during which time the London fixed price of an ounce of gold ranged from the low $300s to the mid $400s. On Dec. 1, 2003 gold rose above $400 for the first time in 24 years. At this time it began its current ascent. In the past year it has fluctuated from a low of $1,314.70 an ounce on Oct. 4, 2010 to a high of $1,900.10 an ounce on Sept. 5, 2011. Its Sept. 5 price was a record high. Its three-month low was $1,495.80 on July 4. Its current price is near $1,638, which is 14 percent off its three-month price.

The London fixed price for an ounce of silver also remained relatively flat from 1991 through the middle of 2000s, outside a price spike in the late 1990s. In 2006, an ounce of silver reached double-digit prices. The London silver fix for the past year has fluctuated between a low of $22.03 on Oct. 4, 2010 and an all-time record high of $48.70 on April 28. Its three-month high was $43.49 on Aug. 22. Its current price is near $32 a troy ounce.

In recent weeks, gold and silver have dipped below their historic highs as broader market conditions have improved and fears of another economic meltdown have waned. Here’s how our ETFs and their counterparts are faring.

SPDR Gold Trust (NYSEARCA:GLD) – The world’s largest gold-backed exchange traded fund seeks to follow the price of gold bullion. It was established in 2004 as gold prices began to climb. It is currently trading around $160 a share. Its price has ranged from $127.80 to $185.85 over the past 52 weeks. It reached a three-month high of $184.59 on August 22 but dropped 7 percent to $171.65 two days later. Over the next couple of weeks, GLD regained a little ground to close at 180.79 on Sept. 9. On Sept. 28, it dipped to $156.22, which is about 15 percent off its three-month high. Its year-to-date return is 28.11 percent, and its yield per share is $0. All of GLD’s $71.82 billion in assets are in gold bullion.

Like other ETFs, broker-dealers, banks, institutions and other participants that are authorized to create or redeem blocks or “baskets” of shares as the market demands. In GLD’s case, each basket consists of 100,000 shares and is worth 10,000 ounces of underlying gold, so one share represents one tenth of an ounce of physical gold. The creation of a new basket can only be effected with the purchase and delivery of the appropriate amount of gold to the physical custodian, HSBC Bank USA’s London vault, so the gold on hand in the vault always corresponds to the number of shares on the secondary market, in theory.

When investors purchase shares of GLD on the secondary market, they are actually purchasing an undivided partial interest in GLD’s bullion. The purpose is to facilitate broader access to the commodity without the hassles and costs of buying, delivering, storing and insuring the physical asset. Not only does GLD allow investors access to the benefits of owning gold bullion, but it also allows pension and mutual funds, which cannot or do not hold physical commodities, to own the hard asset.

Investors should be aware of several issues that surround GLD. Gold is a commodity, so it falls outside the authority of U.S. securities regulators. Since 100 percent of GLD’s assets are gold, it too falls outside SEC jurisdiction, so investors don’t have the same protections as shareholders of ETFs that hold stock. Some questions have circulated about whether the amount of bullion held by trust at the custodian matches the number of shares on the secondary market. In this sense, GLD may be more of a “paper metal” not backed by the hard asset it purports to hold, which is scary like a Ponzi scheme. The fund does not, and was never meant to, generate income, but it sells assets to cover expenses. Therefore, the amount of gold represented by each share declines over time. The share price may also be adversely impacted should a sell be executed at an undesirable market price.

Speculative investors who feel gold will drop in price may consider ProShares UltraShort Gold (NYSEARCA:GLL). GLL is an inverse commodities ETF that is intended to correspond to twice the opposite of the London p.m. fixed price by investing in futures, options, swap agreements and forward contracts. It currently reports $166.84 million in net assets. It is trading near $19 a share. Its 52-week range is $14.29 to $33.05. Over the past three months, GLL reached a high of $23.07 on July 7 and a low of $14.73 on Sept. 2. Its year-to-date return is -43.53 percent, and its yield per share is $0. Its inception date is 2008, so it is even younger than GLD. Because the fund invests in commodities, it falls outside the SEC’s regulatory jurisdiction.

iShares Gold Trust (NYSEARCA:IAU) – Like GLD, this fund seeks to replicate the price of gold, so 100 percent of its $9.75 billion in assets is in bullion. It is currently trading near $16. Its 52-week range is $12.80 to $18.63. Over the past three months it has shown some price volatility. On July 7, it traded at its three-month low of $14.96, and on Aug. 22 it reached its three-month high of 18.50. When gold dropped at the end of September, so did IAU, coming off its high by about 15 percent. Its year-to-date return is 28.20 percent. Incepted in 2005, it has also only recently entered the market. It runs the same risks as GLD.

ProShares Ultra Gold (NYSEARCA:UGL) is a leveraged commodities ETF that invests in gold futures, options, swap agreements and forward contracts like GLL, but instead of seeking to correspond to twice the opposite of the London p.m. like its inverse commodities cousin, its intent is to correspond to 200 percent of bullion’s daily performance. UGL is currently trading near $89 a share. Its 52-week range is $59.84 to $122.34. Over the past three months, it has ranged from a low of $80.06 on July 7to a high of $121.58 on Aug. 22. Its current price is about 27 percent off its three-month high.

Its year-to-date return is 58.34 percent and it has $492.13 million in net assets. Its inception date was December 2008.

The Market Vectors Gold Miners ETF (NYSEARCA:GDX) is currently trading near $50. Its purpose is to replicate the performance of the NYSE Arca Gold Miners Index by investing in common stock and American depository receipts of international gold mining companies. It holds $9.46 billion in net assets. It has also been fairly volatile, ranging in closing price from $50.48 to $66.98. In the last three months, it reached a low of $54.45 on Oct. 3 and a high of $66.63 on Sept. 8. Its year-to-date return is 2.16 percent and yields $0.64 a share. It has net assets of $9.64 billion. Founded in 2006, it too is a fairly new fund. Because it invests in securities, it is regulated, though it carries obvious market risks.

Randgold Resources Limited (NASDAQ:GOLD), a gold mining company, is currently trading near $98. It has fluctuated between $70.18 and $115 over the past 52 weeks. Its dividend yield is 0.2 percent or $0.18.

iShares Silver Trust (NYSEARCA:SLV) – Like GLD, an investment in SLV represents an undivided partial interest in the trust’s net assets, but in this case, it’s silver bullion. It’s also just five years old. SLV is currently trading near $30. It has ranged from $22.21 to $48.35 over the past 52 weeks. In the past three months, it reached a high of $42.63 on Aug. 22 and a low of $28.87 on Sept. 28. Its year-do-date return is -4.21 percent. Its net asset value is $9.78 billion. Investors face the same risks with SLV as they do in other bullion-backed ETFs.

ProShares UltraShort Silver (NYSEARCA:ZSL) is an inverse commodities fund akin to IAU, but instead of investing in gold futures, it invests in silver futures, options, and swap agreements in the hope of corresponding to twice the opposite, or inverse, of silver’s daily London fixed price performance. It is currently trading near $15 a share. It shows a very wide 52-week closing price range of $10.63 to $82. Over the past three months, it reached a low of $10.70 on Sept. 2 and a high of $19.34 on Sept. 23. It is showing a negative year-to-date return of 70.32 percent. Its net asset value is $503.99 million.

Global X Silver Miners ETF (NYSEARCA:SIL) is currently trading near $22. It has ranged from $18.74 to $31.34 over the past 52 weeks. On Oct. 4 it reached a three-month low of $20, which is 30 percent off its three-month high of $28.75 on Sept. 8. Year-to-date return is -19.67 percent. It seeks to replicate the performance of the Solactive Global Silver Miners Index by investing in relevant stocks, so it falls under SEC regulations. It holds $342.23 million in total assets.

iShares Barclays 20+ Year Treasury Bond (NYSEARCA:TLT) – This ETF seeks to correspond to the price and yield of Barclays Capital U.S. 20+ Year Treasury Bond Index Fund by investing in U.S. Treasury bonds with a minimum of 20-year maturities. It is currently trading near $118 and has ranged from $88.14 to $125.03 over the past 52 weeks. Over the past three months, its price has steadily increased overall. On July 7 it closed at $94.04, and on Oct. 7, it closed at $121.36. It holds net assets of $3.25 billion, yields $3.40, and reports a year-to-date return of 32.06 percent.

With an inception date in 2002, it is the longest-running of the ETFs in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.