EC This Week In Gold

First of all, apologies. The title of this column is misleading. Because of publishing turnaround times, I’m really dealing with last week’s market in gold, not this week’s.

No matter. Last week, this week: gold is gold. Gold excites passions. Some folk are enamored of the metal. Others regard it as a “barbarous relic.” Then there’s a more fair-minded contingent of investors who just regard gold’s utility as a diversifying portfolio allocation.

So, fair warning: this column aims to speak to those disinterested investors looking to derive the maximum benefit from gold’s current rally.

Spot bullion prices spiked 2.5 percent last week which doesn’t really sound like much of a move. Put that in context, though. See the chart below? It’s a weekly graph of the SPDR Gold Shares ETF (NYSE Arca: GLD), a proxy for gold bullion’s price. Last week’s action finally nudged GLD above its six-year downtrend line.

(Click on image to enlarge)

So gold’s a buy now, right? It’s early days, but the case for gold has certainly brightened technically. Keep in mind, though, that people buy gold for different purposes and in different ways. Bullion’s a sterile asset. It doesn’t spin off dividends or interest and, for many, it costs money to store and insure. Most people buy physical gold because they lack faith in the ongoing value of paper currency. Others are not so much interested in gold itself but like the way the metal interacts with their portfolio’s assets. Gold is a classic noncorrelated asset.

If you’re considering gold as a portfolio position, you’ve got a number of choices. Here’s a handful of the most popular investments: 

  • SPDR Gold Shares ETF (NYSE Arca: GLD) — The largest exchange-traded product that directly invests in bullion. Because GLD’s net asset value is geared to the London afternoon fix, GLD tracks gold’s price closely.
  • Credit Suisse X-Links Gold Shares Covered Call ETN (Nasdaq: GLDI) — This exchange-traded note attempts to turn gold into an income-producing asset by nominally writing covered calls on GLD shares. Call writing is ideal for a neutral-to-slightly bullish market because it gives away the opportunity to participate gold’s significant upside gains. 
  • PowerShares DB Gold Fund (NYSE Arca: DGL) — Instead of trading in bullion, DGL invests in gold futures using an optimization model to minimize the deleterious effect of continuously rolling contract positions forward. 
  • VanEck Vectors Gold Miners (NYSE Arca: GDX) — GDX is not a pure play on gold: about three-quarters of its price action can be explained by gyrations in the cost of bullion. GDX tracks a market cap-weighted index of global mining outfits.
  • VanEck Vectors Junior Gold Miners (NYSE Arca: GDXJ) — Like its older brother GDX, this fund is a cap-weighted index tracker. The “junior” designation refers to the fund’s original target of smaller-cap mining firms. This puts the fund one step more removed from bullion: less than two-thirds of GDXJ’s day-to-day pricing is driven by gold.  
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Disclosure: Brad Zigler pens's Alternative Insights newsletter. Formerly, he headed up marketing and research for the Pacific Exchange's (now NYSE Arca) option ...

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Jason J. Smith 4 years ago Member's comment

"SPDR Gold Shares ETF (NYSE Arca: GLD) — The largest exchange-traded product that directly invests in bullion."

This is something I'm beginning to question as I research this fund more and more. GLD's structure is a bit strange. They so famously claim that they are 100% backed but obstinately refuse to give investors access to any of the 'claimed' gold. Why? There are many profitable gold selling businesses in the world. GLD could even charge exorbitant fees for delivery of said gold but they don't for some strange reason.

The frequently referenced GLD subcustodian audit loophole makes me question this fund even more. What guarantees do we have that they have not leased the gold from someone else? i.e. HSBC. Are they leasing it to someone else? How many claims are there on the gold aka hypothecation? GLD's structure seems to be deliberately vague and intentionally flawed. GLD's custodian, HSBC, with their long history of fraud certainly do not inspire confidence either.

Farah Kincaid 4 years ago Member's comment

Why so suspicious, Jason?

Otto Harrell 4 years ago Member's comment

"SPDR Gold Shares ETF (NYSE Arca: GLD) — The largest exchange-traded product that directly invests in bullion."

I'm not so sure about this. I've been trying to do my due diligence into the SPDR Gold Trust (GLD). Anyone know why there is a clause in the GLD prospectus that states GLD has no right to audit subcustodial gold holdings? Why would the organizations behind GLD forfeit this right and create such a glaring audit loophole? I have not heard a single good reason for the existence of this loophole thus far. It also doesn't help that GLD claims to be fully backed by physical gold bullion but yet it refuses to give retail investors the right to redeem for any of these ‘claimed’ gold bullion.