Wedding Of The Year: Gold And The Strong Dollar

| About: SPDR Long (GLDW)
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Summary

A new Gold ETF was recently launched that hedges against the strong dollar.

The new ETF is run by the same company as GLD.

The new ETF is cheaper than owning a gold ETF and a strong dollar ETF.

Recently, there was a new gold ETF that was launched and it has gone relatively unnoticed among gold investors. The new ETF is the SPDR Long Dollar Gold Trust ETF (NYSE:GLDW) and was launched by State Street (NYSE:STT), which is the company behind the popular SPDR Gold Trust ETF (NYSEARCA:GLD).

Index Description

GLDW holds physical gold just like GLD; however, unlike GLD, GLDW also factors in currencies to take advantage of a stronger dollar. Here is the basic description of how the index behind GLDW works.

GLDW tracks The Solactive GLD® Long USD Gold Index.

The Index is designed to represent the daily performance of a long position in physical gold (as represented by the Gold Price) and a short position in the basket ("FX Basket") comprised of the Euro, Japanese Yen, British Pound Sterling, Canadian Dollar, Swedish Krona and Swiss Franc ("Reference Currencies") (i.e., a long USD exposure versus the FX Basket). In simple terms, the Index reflects the price of Gold in U.S. dollars adjusted by the price of each Reference Currency comprising the FX Basket against the U.S. dollar."[GLDW Fund Page]

Digging deeper into the prospectus, I found that GLDW has a unique mechanism, by which it accomplishes the goal of accounting for a stronger dollar. It either receives gold from the gold delivery provider if the dollar strengthens and it delivers gold to the gold delivery provider if the dollar weakens. The Gold delivery provider as referenced below is Merrill Lynch International.

The Fund will enter into a transaction to deliver Gold Bullion to, or receive Gold Bullion from, the Gold Delivery Provider each Business Day. [GLDW Prospectus]

"In general, if there is a currency gain (i.e., the value of the USD against the Reference Currencies comprising the FX Basket increases), the Fund will receive Gold Bullion. In general, if there is a currency loss (i.e., the value of the USD against the Reference Currencies comprising the FX Basket decreases), the Fund will deliver Gold Bullion. In this manner, the amount of Gold Bullion held by the Fund will be adjusted to reflect the daily change in the value of the Reference Currencies comprising the FX Basket against the USD." [GLDW Prospectus]

FX Basket

According to the GLDW prospectus, these are the weights of each currency in the FX basket. Since either the currency gain or loss of the FX basket determines if there will be additional gold moving into GLDW, it is important to look at the Euro, which makes up the largest portion of the FX basket. Since the beginning of 2014, the Euro has gone pretty much straight down, which is good for the dollar, and thus good for GLDW. With the United States in a rate hike cycle and the ECB still in easing mode, the Euro at least for the foreseeable future should continue to drift towards parity.

[ThinkorSwim]

One of the current ways that gold investors can hedge their positions is to buy the PowerShares DB USD Bull ETF (NYSEARCA:UUP), which holds the same currencies in the exact same weights as the FX basket that GLDW uses.

FX Basket Weights

Euro (EUR/USD) (57.6%)

Japanese yen (USD/JPY) (13.6%)

British pound sterling (GPB/USD) (11.9%)

Canadian dollar (USD/CAD) (9.1%)

Swedish krona (USD/SEK) (4.2%)

Swiss franc (USD/CHF) (3.6%)

GLDW Vs. GLD/IAU Comparison

GLDW was just launched on January 30th, and because of that, it still has low volume and I suspect that will improve given the current strong dollar environment. Once gold investors see that GLDW is superior to holding GLD or the iShares Gold Trust ETF (NYSEARCA:IAU) with UUP to hedge against the strong dollar, an accumulation of assets and volume should occur. If someone owned GLD and UUP, the combined expense ratios would be 1.20%, and 1.05% if someone owned IAU and UUP. GLDW investors can get the same strong dollar hedge at over half the cost at only 0.50%.

GLDW Expense Ratio: 0.50%

GLD Expense Ratio: 0.40%

IAU Expense Ratio: 0.25%

UUP Expense Ratio: 0.80%

Index Performance Vs. Gold

In the GLDW prospectus, there is an important chart that shows how the underlying index of GLDW has performed against gold since the beginning of 2007. As you can see, for the most part GLDW tracked the price of gold closely until gold spiked in 2011 and gold outperformed. The opposite is now true, as the GLDW underlying index has outperformed gold since the dollar started its run in mid-2014. If the dollar continues to strengthen, then GLDW would be the superior gold fund to own instead of GLD or IAU.

[GLDW Prospectus]

Closing Thoughts

In closing, I believe GLDW is worth keeping an eye on to see if it starts to gain assets and have increased volume. The chart below shows the performance of the U.S. Dollar index since the beginning of 2014. When comparing this chart, to the index performance chart, you can clearly see the period of the dollar significantly increasing matches up with the underlying index of GLDW outperforming gold. If the dollar continues to strengthen in the long term, GLDW, in my opinion, looks like a better way to be long gold than GLD or IAU.

[ThinkorSwim]

Disclaimer: See here.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.