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 a most importantly, a diversification tool in your portfolio.
In this article, let's take a look at the SPDR Gold Trust ETF (GLD, Financial) and try to explain the reasons why this is an appealing investment opportunity.
The past days, Peter Schiff, chief executive officer at Euro Pacific Capital, has recently told Marketwatch in a phone interview that he is still betting on gold. He thinks that investors should bet in gold because he estimates that gold will see $5,000 an ounce and it “could go higher” and continues saying he thinks “the upside in gold stocks is phenomenal from here”.
An Efficient Way to Invest in Gold
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, Financial) is an investment fund incorporated in the U.S. Sponsored by World Gold Trust Services, LLC; marketed by State Street Global Markets, LLC; and managed by the trustee, BNY Mellon Asset Servicing, the investment objective of the Trust is to reflect the performance of the price of gold bullion, (less the trust´s expenses). GLD is the largest and most liquid physically backed gold offering.
A Speculative Bet
Unlike any financial asset, whose value is determined by the present value of their cash flows, gold does not have this characteristic. With no cash flows to discount back, the value is determined by speculation generated in the market. More than half of the gold demand is generated by the jewelry industry. The remainder is from investors and central banks.
The latter have increased demand for the metal. To give an example, central banks have purchased more than 122 metrics tons of gold in the first quarter of 2014, compared to a 5-year average of 72.7 metric tons.
Performance of $10,000 Investment
Although the SPDR Gold Shares has returned almost 10% since inception, the fund has generated a total return of -0.33% in the last five years and -5.84% in the last year. On a year to date basis, the ETF has surged by 2.22%. These numbers indicate that gold is moving from a bear market to a bullish one. According to the last release of the FOMC minutes, one might expect that the Fed will raise rates in June. But the actual scenario of low interest rates today, makes the price of gold, which is traded in U.S. dollars, strengthens.
My advice would be to invest in gold while rates are low. After the Fed increases the rates, there investors should consider investing in dollars, because higher rates will be positive for the U.S. dollar.
Final Comment
Gold could be attractive because of the low correlation with returns of bonds and stocks, so almost every portfolio must consider this option. The investment demand for gold appears to be in an upward trend this year. Recently, after a weaker-than-expected U.S. data, gold jumped rising above $1,200 an ounce, and the obvious question that every investor can make now is whether to invest in gold may present a good buying opportunity for the coming months.
I always like to see the latest hedge fund investments. The fact that billionaire John Paulson (Trades, Portfolio) is long GLD makes me feel comfortable on my bullish sentiment. John Paulson (Trades, Portfolio)’s Paulson & Co is the biggest shareholder of GLD, which holds 10.23 million shares, according to its last 13F filing. The $1.16 billion position represents a significant portion of Mr. Paulson’s portfolio, reaching almost 6% of its value.
Disclosure: As of this writing, Omar Venerio did not hold a position in any of the aforementioned stocks or ETF.
