The current year is quite favorable for gold, including for exchange-traded funds. The SPDR Gold Trust (GLD) has enjoyed a suc cessful year to date, with $12.3 billion in new investment added to the fund through the end of November. Almost all of the fund’s net investment growth accrued in the first quarter, amounting to $12.2 billion (FactSet Research Systems, Inc.). In the first 3 quarters of 2016, physical gold-backed exchange-traded funds added a record 725 tonnes of gold.
Gold-backed exchange-traded funds represent an important part of gold investment demand. To a large extent, they show the mood of wholesale investors, whose behavior is the most difficult to analyze, but also the most important in terms of gold price behavior. Statistics from the World Gold Council show that investment demand for the first half of 2016 represents almost half of global gold demand, setting a historical precedent. In terms of demand for gold jewellery, we have a sharp decline of almost 50% to the lowest levels since 2009. Here a decline was also seen in gold purchases by central banks. It appears that the increase in investment demand is largely due to the demand for ETFs backed by physical gold.
One of the main factors influencing the prices of gold and gold exchange-traded funds is the policy of the US Federal Reserve. Investors are in a very difficult position because the Federal Reserve is inconsistent and therefore dangerous to financial stability. It’s been a long time since we’ve seen Wall Street executives publicly criticize the governor of the Federal Reserve, in this case Janet Yellen. Criticisms target the lack of clarity and predictability in the possible change of key interest rates and quantitative programs. This unpredictability poses obvious risks for higher market volatility ie. stronger price movements.
Gold ETFs are a very useful tool for speculating on the dollar price of gold. They provide an easy and quick way to enter and exit a position, representing an important condition for successful short-term speculation. They are also a useful tool for people who already have the desired weight of physical gold in their portfolio and simply want to trade short-term movements in the price of gold.
Investing in physical gold is, in the long term, what can generate both good capital gains, but also protect us from the negative effects of banking and financial crises.
If we imagine a situation like the bankruptcy of Lehman Brothers , what will be the effects on an investor in gold ETFs, but for one in physical gold? The holder of ETFs has the following risks:
- The Fund and/or authorized intermediary become insolvent;
- The imposition of price caps on the fund’s shares due to the sharp increase in the spot price of gold. In turn, this means relative losses (alternative losses from the rise in the value of gold and the loss of purchasing power of the currency).
In such a situation, the holder of physical gold has a huge advantage as they actually hold one of the most liquid assets at any given time. This means that it has the purchasing power to meet its needs even during a public holiday and a severe liquidity crunch in the monetary system.
Therefore, if you are looking for short-term speculation with the dollar price of gold, then exchange-traded funds are a good choice. If you are looking for protection against possible financial turmoil, banking crises, devaluation of the national currency, then gold ETFs will not be useful for you. One of the most useful assets for such a purpose remains the holding of physical gold.
