Gold has long been considered a reliable store of value and a hedge against economic uncertainty. The advent of exchange-traded funds (ETFs) has provided a convenient way for investors to gain exposure to gold. One such prominent gold ETF is the SPDR Gold Shares (GLD), which tracks the gold spot price, less expenses and liabilities, using gold bars held in London vaults. Here's a closer look at gold as an asset class and the GLD ETF.
What Drives Gold Prices
Gold prices are driven by a complex interplay of factors:
Real interest rates
“Gold is highly correlated to real interest rates,” says Bruce Liegel, a macro fund manager and author of the newsletter Global Macro Playbook. “When real rates are negative, it drives gold higher as negative rates drive the liquidity engine for investment, and eventually inflation. When real rates go positive, it tends to be a braking mechanism for the economy, reducing demand and ultimately lowering inflation.”
Value of the US Dollar
Gold is primarily denominated in US dollars, meaning its value is quoted in terms of the American currency. Dollar-denominated assets generally exhibit an inverse relationship with the US dollar’s value. Consequently, a decline in the dollar's value tends to lead to an increase in the value of gold, and conversely, a rise in the dollar's value may result in a decrease in gold prices.
Read More: Institutionalization of Gold
Demand for gold
As a commodity, gold's price trajectory is also highly influenced by fundamental demand. These demand drivers can be broadly categorized into four primary segments:
(i) Investment Demand
Gold's status as a traditional safe-haven asset attracts investors seeking protection against economic uncertainties, political turmoil, and currency fluctuations. During periods of heightened risk aversion, investors flock towards gold, increasing its demand and pushing up its price.
(ii) Central Bank Demand
Central banks worldwide frequently maintain gold reserves as a strategy to diversify their portfolios and safeguard against external economic shocks.
“Central banks, particularly those of Russia, China and India, have been large purchasers of gold over the last five to 10 years,” says Liegel in his newsletter Global Macro Playbook. “All three of these countries are now part of the BRICS currency that will be backed by gold. As central banks buy gold, it also pushes up the price.”
(iii) Jewelry Demand
Gold's aesthetic appeal and symbolic significance have made it a prized material for jewelry creation for centuries. The continuous demand for gold jewelry, particularly in emerging economies with growing middle classes, serves as a substantial source of demand, influencing gold prices.
(iv) Industrial Demand
Gold's unique properties, including its malleability, resistance to corrosion, and high electrical conductivity, make it a crucial component in various industrial applications. The demand for gold in electronics, dentistry, and other industrial sectors contributes to its overall demand and price dynamics.
Overview of GLD
GLD was introduced by State Street Global Advisors in 2004. The ETF is structured as a grantor trust, which means it holds physical gold bullion in vaults to back its shares. For each share of GLD, investors effectively own a portion of the trust's physical gold holdings.
At the time, GLD was an innovation in that it provided retail investors with an entry point into thegold marketby removing the necessity for storage, insurance, and security concerns associated with owning physical gold.
Liegel highlights the significance of this shift in gold investing, noting, "It used to be the case that investors had to purchase gold bars or coins, which could be prohibitively expensive. These days, by buying just one share of GLD, it is very affordable even for a small investor."
GLD also allows investors to gain direct exposure to gold, instead of gold mining companies which will subject investors to operational risks.
GLD Snapshot (as of December 12 2023)
YTD Return: +8.16%
1Y Return: +10.75%
Maximum drawdown (3Y): -15.81%
Expense Ratio: 0.40%
Total Assets: $55.8 billion
GLD Investment Considerations
Diversification: Adding GLD to a diversified investment portfolio can serve as a hedge against market volatility and economic uncertainty. Gold has historically demonstrated a low correlation with other asset classes, making it an effective diversification tool.
Liquidity: GLD is traded on major stock exchanges, offering investors high liquidity. This means that buying and selling shares can be done easily during market hours at market prices, providing flexibility for short-term and long-term investment strategies.
Expense Ratio: While GLD eliminates the costs associated with physical gold ownership, investors should be aware of its expense ratio (currently at 0.40%). While the expense ratio for GLD is relatively low compared to other investment options, it's important for investors to factor this cost into their overall return expectations.
Market Conditions: Gold prices are influenced by various factors, including economic conditions, interest rates, and geopolitical events. Investors should monitor these factors and assess how they may impact the price of gold, and consequently, the performance of GLD.
Related Reading: Institutionalization of Gold
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
