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In a Weak-Dollar Environment, Gold Is Sought as "Safe-Haven" Asset

July 10, 2014 | About:
Omar Venerio

ovenerio

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Gold is a limited commodity that retains consumer´s purchasing power even under inflationary economies. The advantages are that gold is not at the mercy of government policy, so it cannot be easily issued or mined. Additionally, it is used to hedge, so it is a currency hedge an inflation hedge and most importantly, a diversification tool in your portfolio.

Gold Exchange-Traded Fund

An ETF is a special type of fund that invests in a portfolio of stocks or bonds. The aim is to mimic the performance of a specified index. As well as the shares, they are traded in the secondary market at any time (market hours) and investors can sell short. The advantages of this investment vehicle are that they provide an efficient method of diversification because investors gain exposure to an index or a particular sector. Secondly, investors know the composition of the fund at all times. Moreover, as they are a passively managed fund, they have good operating expense ratios.

The SPDR Gold Shares (GLD) is an investment fund incorporated in the U.S. and is managed by a team at SSgA Funds Management Inc. This fund is one of 126 SSgA Funds Management Inc. exchange-traded funds launched since 12/16/1998. The investment objective of the Trust is to reflect the performance of the price of gold bullion, (less the trust´s expenses). It is the largest and most liquid physically backed gold offering.

The SPDR Gold Shares has returned an annual rate of about 11% since inception. More recently, on a year to date basis, the ETF has returned 6.49%.

How does that compare to other funds?

The SPDR S&P 500 (SPY) is managed by State Street Bank and Trust Company. It seeks to track the price performance of the underlying holdings in the S&P 500 Index. It measures the performance of the large capitalization sector of the U.S. equity market. The Index is a capitalization-weighted index from a broad range of industries chosen for market size, liquidity and industry group representation. The S&P 500 is a popular proxy for the U.S. market and an indicator of the economic health of the U.S. It is best suited for investors looking for diversification across sectors at a low cost.

In the next graph we can appreciate the evolution of both investments in a five-year period.

1405029037655.png

For those investors seeking to invest their money in an ETF with exposure to large cap U.S. equities, the SPY ETF is a good option because it offers diversification and has a total return that ranks very high in comparison with peers over the last five years. The SPDR S&P 500 ETF has returned an annual rate of about 9% since inception.

Final Comment

In a world where inflation has been almost inexistent in most countries, there is low demand for gold as a safe-haven asset and inflationary hedge.

The U.S. economy is showing signs of improvement and the dollar is getting stronger and we expect for the upcoming future that production costs may still be rising.

The actual world scenario is one where Japan is expanding its credit in order to stimulate the economy. Days ago, the European Central Bank cut interest rates for the first time since 2012 as well as several countries such as Australia, India, Turkey, Denmark, Israel, Poland, Mexico, Kenya, and South Korea. Further, China has recently cut its corporate tax rate and increased infrastructure spending. For all these reasons, I believe that inflation also looks like it's about to rise, so it’s time to invest in gold.

Hedge fund gurus have also been active in relation to this ETF. Gurus like Frank Sands (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), George Soros (Trades, Portfolio), Jean-Marie Eveillard (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), John Burbank (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) have taken long positions in the first-quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned.

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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Comments

m.siddiquee
M.siddiquee - 4 months ago
"Civilized people do not invest in gold" _Charlie Munger (Trades, Portfolio)

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