Gold ETFs Setting New Highs

During the final days of July, Gold hit new all-time highs just below $2,000. The record run higher for the precious yellow metal, and for most of the precious metals has been in large part caused by the worldwide pandemic. As investors become nervous about the future, many find safe harbor in gold and other hard asset metals.

The bull market will likely continue as long as the pandemic and world economies struggle to gain traction. But, if we see a vaccine that protects against Covid-19, the price of gold will likely begin to fall as investors move back away from safe investments and back into equities, bonds, and other higher-risk – higher growth investments. When the rally ends, well, that’s, of course, the trillion-dollar question and one that I can’t help with. However, I can point you in the right direction of what to invest in regardless of which way you think the price is headed.

The big dog in the gold Exchange Traded Fund world is the SPDR Gold Trust (GLD). GLD has over $77 billion in assets under management and has been in existence since 2004. The fund charges a 0.4% expense ratio and has an average daily dollar amount volume of just over $1.76 billion, meaning it typically has liquidity. GLD tracks the gold spot price using gold bars held in vaults in London. This is an excellent option for anyone who wants the protection of gold but doesn’t want the hassle of buying actual gold bars.

The only big downside to GLD is that one share will cost you roughly $185. But there is a solution to that problem, and it’s called the SPDR Gold MiniShares Trust (GLDM). GLDM is essentially the same thing as GLD, but it holds 1/10th as much gold per share as GLD, and therefore each share costs less. As of this writing, GLD is $184.98 per share, while GLDM is $19.61 per share. GLDM tracks the spot price of gold the same as GLD, but it also has a lower expense ratio of just 0.18%. It also has much fewer assets under management of just $3.22 billion and therefore is less liquid for large orders. But again, if you want to place a large order, go with GLD. GLDM is designed for the small retail investor, not the large funds that need exposure to gold.

The other way to invest in the spot price is the iShares Gold Trust (IAU). This is again the same as it tracks it using gold bars held in vaults around the world. IAU is more like GLDM in that its share price is only $18.80, making it more affordable for the smaller investor. But, it has more than $30 billion in assets under management, and therefore its much more liquid than GLDM. The only downside is the expense ratio of 0.25%, compared to GLDM’s 0.18%.

If you think gold is going to fall and don’t want to use leverage, you can buy the DB Gold Short ETN (DGZ). This product does use futures contracts to get the ‘short’ position. Still, it buys contracts on gold that are determined to be the least impacted by contango, which allows you to own them for a longer-term than 2 or 3 X leveraged products without feeling too much of the adverse contango effects.

If you are interested in a little more risk-reward, than the ProShares Ultra Gold ETF (UGL) may be the ticket. UGL provides 2X leverage to the daily price of gold bullion measured by the fixing price for delivery in London. Since this is a leveraged product, it is meant to be used daily, not to be held long-term since the compounding costs associated with gaining leverage can be a negative drag on the price of each share. The fund also carries a 0.95% expense ratio and currently has $270 million in assets.

The other side of UGL would be the DB Double Short ETN (DZZ). DZZ will give you 2X negative exposure to the price of gold daily. DZZ has an expense ratio of 0.75%, but should only be held for short periods, due to the way the fund gains the -2X exposure, holding for long periods will have a negative effect on returns, even if the price of gold does decline. So, if you think gold is going higher tomorrow, buy UGL. If you think gold is going to fall tomorrow, buy DZZ.

The other idea of how to play gold would be buying the gold miners. The VanEck Vector’s Gold Miners ETF (GDX) or the Direxion Daily Gold Miners Index Bull 2X Shares ETF (NUGT) will give you exposure to the gold miners themselves. If the price of gold goes higher, these companies will ideally make more money as long as the cost of extracting gold from the ground doesn’t go higher.

If you think the gold miners are going to fall, then the Direxion Daily Gold Miners Index Bear 2X ETF (DUST) and the Direxion Daily Junior Gold Miners Index Bear 2X ETF (JDST) are your two options. As with all leveraged products that use futures and options to gain exposure, these funds should not be held for long periods more than a day. But, if you believe the decline is coming, they can be good options.

As with any investment, considerations should be made as to how gold fits in with your portfolio and whether it is right for you. While it is now at all-time highs, you need to remember that long term it has not been a market-beating investment and will likely continue to trail the market over long periods. But it does offer some protection and return during very uncertain times.

Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513

Disclosure: This contributor held long positions in Apple, Tesla, Intel, Google, Amazon.com, Facebook, Priceline and Microsoft at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.