Gold futures for April delivery hit $1,757.60 an ounce Feb. 2, an eight-week high. The commodity has been on a roll since the turn of the century, when its price was $290 an ounce. That’s a cumulative return of 506%.
The S&P 500, in comparison, achieved a cumulative loss of 9.9% over the same 12-year period. Gold supporters like Standard Chartered Bank believe the supply-and-demand imbalance will drive the price to $5,000 an ounce. The banks analysts aren’t saying when this will happen, but they do recommend investors buy exchange-traded funds to take advantage. Here’s a look at some of the possible choices among gold ETFs.
According to The Wall Street Journal, more than 40 ETFs globally hold gold bullion with total assets of $132 billion. The rise in gold prices is due in part to the proliferation of gold ETFs. The World Gold Council, creator of the SPDR Gold Shares (NYSE:GLD), suggests that 13% of the gold bought globally in 2009-2010 was for funds like the SPDR. That means the investment itself is growing faster than the purchase of jewelry, which is traditionally why people buy the yellow metal in the first place.
Analysts believe that whatever effect ETFs have had on the price of gold on the way up, they could also have an equal effect on a possible decline. Anyone interested in owning one of these ETFs should keep this in mind when considering the investment.
The biggest gold ETF is the SPDR Gold Shares, with $71.1 billion in total net assets. In addition to its golden stature, it also happens to be the third-largest ETF behind only the SPDR S&P 500 ETF (NYSEARCA:SPY) and the Vanguard Total Stock Market ETF (NYSE:VTI). Needless to say it’s extremely popular.
As with all ETFs, an important consideration is the fees paid to the investment manager in exchange for the convenience of owning the fund, as opposed to owning the gold itself. State Street Global Advisors (manager of all the SPDRs) charges 0.40% annually, which according to the Journal, is about the same cost of buying, storing and insuring a small amount of gold.
In terms of the tracking error, it’s about 1.26%. The SPY and VTI are 0.13% and 0.08%, respectively. If you must own gold, this is a far easier option, but it comes at a price.
Another ETF backed by actual gold is the iShares Gold Trust (NYSE:IAU), which charges a more reasonable 0.25% per year. Most of its gold is held in trust by JPMorgan Chase (NYSE:JPM), the custodian, in vaults primarily in New York and London as well as a smaller amount in Toronto. The tracking error is identical to the SPDR Gold Shares at 1.26%, which begs the question why anyone would buy the SPDR.
On a five-year performance basis through January 31, 2012, the iShares fund’s total return is six basis points higher. Considering the bid/ask spread is virtually identical, the question needs repeating: Why own the SPDR Gold Shares?
For those who want their gold stored outside the U.S., you might have a look at the Sprott Physical Gold Trust (NYSE:PHYS), a closed-end trust that stores its gold in Ottawa, with the Royal Canadian Mint. The trust charges 0.35% annually, which fits nicely between the iShares and the SPDRs expense ratios.
ETF specialists rightfully point out that the trust doesn’t have the ability to create or redeem shares, and as a result can trade at a large premium or discount to the net asset value. While true, PHYS does have an interesting feature that gold bugs will find appealing: the ability for unit holders with the equivalent dollar value of one gold bar (400 ounces) to redeem their units for actual bullion.
This means you can actually obtain the physical gold for slightly less than what it would cost to do so on your own. I’m not sure how many people actually take advantage of this benefit, but it’s an interesting option nonetheless.
Bottom Line
These three funds allow anyone caught with the gold bug to indirectly own the physical commodity itself rather than a bunch of futures. If you’re not entirely sold on the idea of owning gold outright, you might consider a broader-based equity fund that has some gold miners in its portfolio. Whatever your decision, you’ll want to go easy on the investment. Gold has a way of getting range-bound for an extended period of time.
As of this writing, Will Ashworth didn’t own a position in any of the stocks mentioned here.
