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Gold ETF Inflows Hits 6-Year High: How To Go Long

Published 08/21/2019, 09:55 PM
Updated 07/09/2023, 06:31 AM

The recent broad market rout triggered by trade jitters and inversion of the yield curve has led to spike in gold price, compelling investors to flock to gold-based ETFs (read: Don't Fear Yield Curve Inversion, Play These Top ETFs Instead).

According to data from the World Gold Council (WGC), global investors poured in about $2.6 billion into gold-backed ETFs in July — the highest monthly investment since March 2013. Per Bloomberg, inflows into ETFs hit 1,000 tons since holdings bottomed in 2016. Total known ETF holdings expanded to 2,424.9 tons on Aug 14, the highest since 2013.

The flight to safety as well as easing monetary policies across the globe is attracting capital into gold ETFs. This is because the yellow metal is considered a great store of value and hedge against market turmoil. In particular, U.S.-China trade conflicts, weak global economic data, low inflation and political unrest in Hong Kong have reignited worries about global slowdown and resulted in a steep fall in global yields.

Meanwhile, the Federal Reserve recently cut interest rates by 25 bps to 2-2.5% for the first time since the 2008 financial crisis and markets are expecting for more rate cuts this year. This has propelled the yellow metal higher as lower rates will continue to weigh on the dollar against the basket of currencies, raising the yellow metal’s attractiveness. Gold does not pay interest like fixed-income assets. Additionally, easing money policies from other major central banks also boosted the yellow metal (read: Gold ETFs Likely to Rule 2H Irrespective of Fed Rate Cut).

Further, the central banks have become significant buyers of gold that has propelled the demand for physical gold ETFs as these have been the only potential source of physical supply over the last eight years.

Given these, the ultra-popular SPDR Gold Trust (P:GLD) ETF (TSXV:GLD) , with an asset base of around $40.9 billion and average daily volume of around 9 million shares, has pulled in around $2.4 billion in capital so far this quarter.

As a result, investors who are bullish on gold right now may want to consider a near-term long on the precious metal. Fortunately, with the advent of ETFs, this is quite easy as there are many options for accomplishing this task. Below, we highlight them and some of the key differences between each:

ProShares Ultra Gold ETF UGL

This fund seeks to deliver twice (2x or 200%) the return of the daily performance of Bloomberg Gold Subindex. It charges 95 bps in fees a year and has amassed $116 million in its asset base. Volume is moderate at around 101,000 shares per day (read: How to Bet on Gold Surge With ETFs & Stocks).

DB Gold Double Long ETN (BS:DGP)

This ETN seeks to deliver twice the return of the daily performance of the Deutsche Bank (DE:DBKGn) Liquid Commodity Index Optimum Yield Gold. DGP initiates a long position in the gold futures market, charging 75 bps in fees per year from investors. It has accumulated over $111.4 million in its asset base so far and trades in average daily volume of 20,000 shares.

VelocityShares 3x Long Gold ETN UGLD

This product provides three times (3x or 300%) exposure to the daily performance of the S&P GSCI Gold Index Excess Return plus returns from U.S. T-bills net of fees and expenses. The ETN has been able to manage an asset base of $179 million, while charging investors a higher fee of 1.35% annually. The note trades in lower volume of around 116,000 shares a day on average.

Bottom Line

It is clear that buying pressure has been intense for gold and the recent trend is extremely favorable for the commodity. Additional buying could be in the cards if trade tensions escalate further and send the stock market into a tailspin. This situation will compel investors to remain focused on precious metals as a store of wealth and hedge against market turmoil.

However, investors should note that since the abovementioned products are extremely volatile, these are suitable only for traders and those with high-risk tolerance. Additionally, the daily rebalancing – when combined with leverage – may make these products deviate significantly from the expected long-term performance figures (see: all the Leveraged Commodity ETFs here).

Still, for ETF investors who are bullish on gold for the near term, either of the above products could make an interesting choice. Clearly, a near-term long could be intriguing for those with high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world.

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ProShares Ultra Gold (UGL): ETF Research Reports

VelocityShares 3x Long Gold ETN linked to the S&P GSCI Gold In (UGLD): ETF Research Reports

DB GD 2XL (DGP): ETF Research Reports

SPDR Gold Shares (NYSE:GLD): ETF Research Reports

Original post

Zacks Investment Research

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