After a lackluster 2013, Gold is performing remarkably well this year. Most of the gains can be attributed to weak equity markets, momentum sell-off, uneven economic growth, firming dollar and the Ukraine crisis. Now, escalating violence in Iraq is boosting the appeal for the safe haven across the board.
In fact, the gold bullion climbed 6% in the year-to-date time frame and is easily outperforming the broad markets when compared to the 4.8% gain for the S&P 500, 3.5% for Nasdaq, 1.2% gain for Dow Jones and 0.08% for FTSE. This trend is likely to continue this year given rising demand and geopolitical tensions.
Global Demand Dynamics
Global demand for gold in the first quarter remained steady as rising jewelry purchase was offset by weakening demand for gold bars and coins. Jewelry demand reached the highest level since 2005 on increased purchases in China.
The demand for yellow metal is likely to pick up in world’s two largest consuming nations – China and India. This is especially true as the new Indian government is expected to ease curbs on gold exports that would allow private trading companies to bring the precious metal into the country. Easing of restrictions would propel the demand for the yellow metal higher.
Additionally, the World Gold Council expects gold demand in China to rise about 20% over the next few years.
Global Trends
The global economy is currently seeing risks arising from geopolitical tensions in Ukraine and Iraq that are heavily weighing on the global equity markets but are supporting gold prices.
Iraq is facing the threat of civil war and a possible fragmentation if the violence by the Sunni rebels in the nation escalates. This is because the Sunni Islamist militants, led by the Islamic State of Iraq and Syria (ISIS), have captured the three major northern Iraqi cities – Mosul, Tikrit, and Baiji – solidifying their grip on the north. The extremists are now advancing toward the capital city of Baghdad.
Meanwhile, tensions in Russia have intensified as the country has cut natural gas supply to Ukraine after failing to reach a new deal for payments amid continued fighting in eastern Ukraine.
The instability in both nations will continue to fuel rally in gold prices and the related ETFs at least in the near term. Given this, investors could consider the gold ETFs in order to take advantage of the recent surge. While there are several unleveraged options to play gold, we have highlighted the four popular products in the space.
These funds seek to match the spot price of gold, net of fees and expenses, and own gold bars to back the shares. These products hold a decent Zacks ETF Rank of 3 or ‘Hold’ rating:
SPDR Gold Trust ETF (ARCA:GLD)
This is the largest and most popular ETF in the gold space with AUM of $32.3 billion and average daily volume of about 7.1 million shares a day. The fund tracks almost 100% of the physical price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. Each share represents about 1/10th of an ounce of gold at current prices. The ETF charges 40 bps in annual fees and has added about 5.4% so far this year.
iShares Gold Trust (NYSE:IAU)
This is the second largest fund in the gold space with asset base of around $6.7 billion. The product is backed by physical gold under the custody of JP Morgan Chase Bank in London. Each share represents about 1/100th of an ounce of bullion at current prices. The ETF charges 25 bps in fees and expenses and trades in solid average daily volume of 3.1 million shares. IAU has gained 5.6% in the year-to-date time frame.
ETFS Physical Swiss Gold Shares (ARCA:SGOL)
This fund holds physical gold bullion bars of secure vaults in Zurich, Switzerland and has amassed $1.1 billion in its asset base. Volume is small, trading under 34,000 shares per day. The product has an expense ratio of 0.39% and added 5.4% so far this year.
ETFS Physical Asian Gold Shares (AGOL)
This ETF is the least popular and illiquid with AUM of $56.5 million and average daily volume of under 1,000 shares. The fund holds bars of secure vaults in Singapore under the custody of JPMorgan Chase Bank, USA. Though unpopular, AGOL leads the unleveraged gold ETF world, gaining nearly 7% in the year-to-date time frame (read: 3 Low-Risk ETFs Beating SPY This Year).
Bottom Line
It is clear that buying pressure has been intense for gold and that the recent trend is extremely favorable for the commodity given the firming dollar. Additional buying could be in the cards for the space if tensions in Iraq continue to escalate or U.S. economy shows signs of slowdown.