Three Things to Know About Gold ETFs

Gold ETFs, lose their predictive power, leveraged gold ETFs under perform.

September 3, 2014

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gold rolexOver a mere five years, gold investors have experienced the best of times and the worst of times. Exchange-traded funds (ETFs) backed by gold hit record prices in 2011—and then experienced the worst sell-off in 30 years in 2013. At the centre of this love-hate dance between investors and the bright shiny metal are ETFs that have become the vehicle of choice as investors express their views on where gold prices will go next. As the ETF space evolves and as gold prices fluctuate, these three articles caught my eye last week.

Gold-backed funds are losing their predictive power — Last week, Bloomberg reported that after a decade spent mainly moving in sync, gold prices and holdings in ETFs backed by bullion have had the most negative correlation since 2004. In other words, notes Bloomberg, investment in gold ETFs is moving in the opposite direction of New York futures for five weeks straight—the longest stretch since 2012. The conclusion? Gold-backed ETFs are becoming less useful as market predictors.

Leveraged gold ETFs underperform — As gold ETFs lose their shine when it comes to predicting prices, still another piece of research shows that investors should be careful when it comes to investing in leveraged gold ETFs. “Price Dynamics of Gold Futures and Gold Leveraged ETFs,” a paper recently posted on SSRN by two academics from Columbia University, raises questions about gold leveraged ETFs. The paper looks at the price relationship between gold spot, futures, ETFs and leveraged ETFs. The authors find significant co-movements among the spot, futures and ETF. However, gold leveraged ETFs got a failing grade. As they conclude:

“We show that static portfolios consisting of one or two futures with different maturities can effectively replicate the spot gold price. As for gold leveraged ETFs, their average returns tend to be lower than the corresponding multiple…of the spot’s returns, and the underperformance worsens over a longer holding period.”

So the longer you hold the leveraged ETF, the worse the performance is.

Investing giants still love their gold ETFs — Despite record outflows in gold ETFs, at least two major hedge fund investors are holding tight when it comes to their view on gold prices. Reuters reports that George Soros has just boosted his stake in Market Vectors Gold Miners ETF, up to 2.05 million shares from 1.16 million shares in the first quarter. He also added 1.33 million shares in call options of the Gold Miners ETF valued at $35 million, and one million equity shares in Allied Nevada Gold Corp. At the same time, hedge fund Paulson & Co. is holding tight with its gold shares as well.

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