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Saturday, September 25, 2021

Physical Gold Vs GLD, IAU and UGLD


Exchange-traded funds (ETFs) give traders access to the price movements of gold without having to buy physical gold. Instead, the ETF does this for the investor.

Gold ETFs are typically structured as trusts. Under this structure, the ETF holds a certain amount of gold for each share of the ETF issued. Buying a share means owning a portion of the gold held by the trust.

These types of funds hold physical gold, so their prices move with the price of gold over the short term and the long term. There are only minor tracking errors when the ETF price deviates from the gold price. When tracking errors occur, arbitrageurs quickly correct them.

There are many gold ETFs, but we will only consider the most popular choices for this discussion.

The SPDR Gold Trust (GLD) is the most popular gold ETF, with $44-B in assets under management as of November 2019. The GLD ETF averaged more than $1.4-B a day in volume.

According to SPDR, each share was worth 0.094214 gold ounces in net asset value (NAV). As the price of actual gold moves up or down, so does the price of GLD. Investors may push the price above or below the NAV, meaning that the shares may be worth slightly more or less than 0.094214 ounces of gold.

The GLD ETF began trading at approximately 1/10 the price of gold. However, the amount of gold held by each share is eroded slightly over time as the ETF charges investors a 0.4% annual fee. These fees slowly lower the NAV of the ETF, thus slightly reducing the amount of gold that a share is worth each year. This fee is relatively modest in the context of gold’s long-term gains. Remember that gold returned about 7.65% per year between Ys 1971 and 2018, according to World Gold Council data. Physical gold storage and insurance fees for small investors are usually higher than 0.4% per year. Therefore, gold ETFs are an efficient vehicle for investing in gold.

Remember that gold returned about 7.65% per year between 1971 and 2018, according to World Gold Council data.

Another popular gold ETF is the iShares Gold Trust (IAU), with about $17-B in assets under management in November 2019. The ETF averaged more than $300-M a day in volume. IAU has a 0.25% expense ratio, and it began trading at approximately 1/100 the price of gold. IAU also holds gold in trust and has a structure similar to GLD.

Leveraged and inverse gold funds are also available. These funds are more complex than gold ETFs because they do not hold physical gold in trust. Rather than exchange-traded funds, leveraged and inverse funds often trade as exchange-traded notes (ETNs). ETNs are debt obligations of the underwriter of the ETN. The price of the ETN tracks a commodity index. However, an ETN depends on the creditworthiness of the underwriter and does not give investors ownership of gold.

Leveraged and inverse gold ETNs are only intended for short-term trades. They accurately track the daily movements in the price of gold, not the long-term changes. The use of leverage over time can magnify losses from volatility. Inverse gold funds have negative expected returns in the long run because the price of gold generally rises in a fiat money system.

Leveraged and inverse gold ETNs are only intended for short-term trades.

The Velocity Shares 3x Long Gold ETN (UGLD) provides exposure to three times the daily movement of gold futures contracts. Its expense ratio was 1.35%, with an average daily volume of about $20-M in November 2019.

The DB Gold Double Short ETN (DZZ) moves inversely to gold prices. If gold moves up 1% today, DZZ should drop by 2% because it moves 2X as much in the opposite direction. The average daily volume was only around $80,000 as of November 2019. It had a 0.75% expense ratio at that time.

Gold ETFs operating as trusts are straightforward. The trust holds physical gold and issues shares. The shareholder has fractional ownership of that gold. The shares reflect the price movement of actual gold, but typically at about 1/10 or 1/100 of the metal’s price. The expense ratio slowly erodes the amount of gold for each share. However, ETFs are still typically more efficient than buying physical gold and storing it. Inverse and leveraged ETNs are more complex than ETFs. They track daily gold price changes by going in the opposite direction or magnifying price movements. Unfortunately, leveraged and inverse ETNs do not accurately track long-term gold price changes.

Have a terrific week

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