Gold continues to be a good bet in tumultuous market
BOSTON — Gold is approaching a new milestone in its role as an investment and haven, with the leading exchange-traded fund that tracks bullion closing in on its equities counterpart as the biggest ETF by market value.
SPDR Gold Trust’s market capitalization rose to $76.4 billion on Aug. 19, according to the most recent data compiled by Bloomberg, as the metal topped $1,881 an ounce for the first time. SPDR S&P 500 ETF Trust, which has been the industry’s largest exchange-traded fund since 1993, stood at $78 billion, a 2.1 percent advantage. At the start of the year, the Standard & Poor’s 500 Index-tracking ETF was 56 percent larger.
“Gold has become the portfolio antidote for the global financial crisis,” James McDonald, chief investment strategist at Northern Trust Corp., the Chicago-based custody bank and money manager, said in an interview.
The metal is up more than 30 percent in 2011, which would be its 11th straight year of gains, while the S&P 500 Index, a benchmark of the biggest U.S. stocks, has lost 9.5 percent including dividends. Investors have accelerated the retreat from equities on concerns that European countries will struggle to repay their debts and that the U.S. economy is weakening under the strain of unemployment above 9 percent, falling home values and a decline in consumer confidence.
The ETFs market values for Aug. 19 market are based on shares outstanding from the previous day. Neither fund has disclosed the data as of Aug. 19.
“We are seeing some lasting asset-allocation shifts to gold, including by central banks, as well as some safe-haven flows that could well be reversed in the months ahead,” said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., the Newport Beach, Calif.-based manager of $1.3 trillion in assets.
“The dramatic surge in demand for gold reflects the aggregation of many investor preferences — for example, from those seeking shelter from lower stock markets to those protecting against currency debasement by central banks,” El- Erian wrote in an emailed response to questions.
Gold underperformed U.S. stocks in the 1990s in an era of deregulation, Frank Holmes, chief investment officer and CEO of San Antonio-based U.S. Global Investors Inc., said in an interview. That trend started to reverse in 2002 as government regulation increased, and accelerated with the Dodd-Frank rules instituted after the financial crisis of 2008, Holmes said. Rising demand from emerging economies such as India and China has also contributed to higher prices of the metal, he said.
“We’re on a hyper-speed of regulation, and that’s not the best thing for the stock markets,” said Holmes, who oversees more than $3 billion in funds including those that invest in gold-mining stocks. “The rise of China and India has set up a different dynamic for gold, so you’re seeing the fear trade as well as the love trade.”
The SPDR Gold Trust ETF, created by the World Gold Council in November 2004, is the biggest ETF tracking the price of the precious metal. State Street, based in Boston, is the sales and marketing agent for the fund, which is physically backed by gold bars deposited in a London vault. It’s one of at least three such U.S.-based ETFs. New York-based BlackRock’s iShares Gold Trust had a market value of $9.95 billion on Aug. 19.
The growth in SPDR Gold Trust this year has been largely driven by the rising value of gold, as the number of shares outstanding in the fund increased by about 1 percent. Since July 1, the number of shares in Gold Trust has climbed by 6.8 percent, contributing to the gain in assets.
Investors turn to gold in times of financial and economic turmoil as an alternative store of wealth to stocks and the dollar and a hedge against inflation. Cash and Treasuries are also haven investments, and are considered safer than gold, according Northern Trust’s McDonald.
“Gold is not a substitute for cash or Treasury bonds,” he said. “Because of the lack of an earnings stream behind it, when sentiment shifts, gold can go in the other direction and will have more momentum behind it.”
The SPDR S&P 500, opened in January 1993, is the oldest existing product in the ETF industry, which oversees $1.1 trillion in assets in the U.S. It’s one of three U.S. ETFs larger than $1 billion that track the Standard & Poor’s 500 Index, excluding leveraged and inverse funds.
Unlike mutual funds, ETFs create or redeem shares in large blocks at the request of big institutional investors, known as authorized participants. Small investors must purchase or sell shares on an exchange, where they trade throughout the day like stocks. U.S. mutual funds are priced once a day, after the close of regular trading.
The creation of ETFs to invest in gold has given investors a way to benefit from rising gold prices, without having to directly own or trade the precious metal.