Gold has long been considered a safe haven with its ability to be a resilient store of value in the face of adverse economic or geopolitical environments. This has made gold a unique asset given the great sense of security attached to it. It is a hedge against inflation and currency depreciation and it has the ability to anchor a portfolio in turbulent times, making it a perfect portfolio diversifier.
Here’s a look at the broader trends in factors that determine the demand of gold along with an overview of the top gold exchange traded funds (ETFs). The demand for gold is broadly governed by the demand for jewelry, technology or industrial use, demand by central banks, investments and the market sentiments.
Jewelry is the largest source of annual demand for gold per sector, accounting for around 50% of total demand according to the World Gold Council. China and India are the two major markets with high demand for gold. The huge domestic demand for gold in these two nations has turned them as the biggest importers of gold, which is counterproductive to many of their economic policies. Authorities in these two nations have often set quota restrictions and even complete bans on gold imports during different phases.
The love for gold isn’t restricted to jewelry. The 2008 financial crisis resulted in a shift in the approach of central banks globally as many felt its relevance post the 2008 crisis. For example, the European Central Bank, along with twenty other central banks, has entered into an agreement called the Central Bank Gold Agreement (CGBA) to ensure that these central banks do not engage in uncoordinated large-scale gold sales, which can destabilize the gold markets. While CGBA 1, CGBA 2 and CGBA 3 had annual limits for how much gold could be sold, the CBGA 4 doesn’t have any quantitative limit on gold sale, which means there is “no intent to sell gold” by these banks. The CGGBA 4 signatories currently hold 11,437 metric tons of gold.
The official holdings by U.S. is at 8,133.5 metric tons, which is the highest among nations. The gold held by the U.S. constitutes almost 77% of its total foreign reserves. Germany comes second with 3,366.8 tons, which is 73% of its total reserves. Russia, China and India have 2,241.9 tons, 1,948.3 tons and 618.2 tons respectively, which is equivalent to 20.2%, 2.9% and 6.9% of their total foreign exchange reserves.
In addition, the industrial use of gold is a source of its demand. Gold has been used in electronics, dentistry, medicine, engineering, and environmental management.
The demand for gold for investing purposes is primarily because of the sense of security attached to it as well as its low or negative correlation with other assets over the years. The economic forces that determine the price of gold are different from the factors that influence the price of other asset classes, such as equities, bonds or real estate.
The fear of a slowing global economy, rising geopolitical tensions, trade tensions, lower interest rates and the level of negative yielding debt and momentum buying has pushed investors towards gold as an investment. Holdings in gold-backed ETFs hit a new all-time high of 2,855.3 tons in Q3 2019.
“Global gold-backed assets under management (AUM) have grown 38% this year, partially driven by the gold price appreciation; this figure is 10% below their historical record in 2012 when the price of gold was above $1,700/oz,” notes a report.
Here’s a look at the top three ETFs (in terms of size).
SPDR Gold Trust (GLD) is the largest physically backed gold ETF in the world. Launched in 2004, GLD offers a seamless way to investors of participating in the gold bullion market without the necessity of taking physical delivery of gold. The ETF trades on NYSE ARCA along with exchanges such as the Singapore Stock Exchange, Tokyo Stock Exchange, The Stock Exchange of Hong Kong and the Mexican Stock Exchange (BMV). The fund has $42.03 billion in assets under management, and an expense ratio of 0.40%.
Launched in 2005, the iShares Gold Trust (IAU) is the second largest ETF in terms of assets under management, which are currently to the tune of $16.83 billion. The iShares Gold Trust seeks to reflect generally the performance of the price of gold. The funds’ beta versus S&P 500 is minus 0.03. The fund is benchmarked against LBMA gold price and has an expense ratio of 0.25%.
Aberdeen Standard Physical Swiss Gold Shares ETF (SGOL) reflects the performance of the price of gold bullion. Launched in 2009, the trust holds allocated physical gold bullion bars stored in secure vaults in Zurich, Switzerland. The fund has $1.14 billion as assets under management, an expense ratio of 0.17% and has London PM Fix for gold as its benchmark.
Some of the other notable ETFs are SPDR Gold MiniShares trust (GLDM), GranteShares Gold trust (BAR), Van Eck Gold Trust (OUNZ), Perth Mint Physical Gold ETF (AAAU), and Invesco DB Gold Fund (DGL), among others.
While some element of gold is good to add efficient diversification for any portfolio, the yellow metal has its periods when it lacks some luster and thus shouldn’t be added beyond a critical 5-10% in a portfolio.
The author has no position in any stocks mentioned. Investors should consider the above information not as a de facto recommendation, but as an idea for further consideration.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.