SGOL Abrdn Physical Gold Shares ETF

This morning, the gold prices rose about 1.5% after comments from the Federal Reserve Chairman that faster growth will be needed to boost employment, "a process that can be supported by continued accommodative policies”.  The comments were interpreted by the market as “further quantitative easing measures may be necessary to boost the economy”.

Gold had started the year on an excellent note, rising more than 12% during the first two months of the year, due to heighted macroeconomic uncertainties and continued money printing in many countries. Gold acts as an inflation hedge and store of value. However as the economic recovery in the U.S. appeared to be gaining traction and European debt situation appeared to be under control, the hopes for further stimulus faded. As a result, Gold and other precious metals came under pressure in the last few weeks. Gold also lagged behind the other two precious metals Platinum and Silver, both of which have recorded double digit gains year-to-date.

Gold has lost about 8% this month, down from $1788 at the end of February 2012 to $1651 as of March 23, 2012, but it is still up about 5% for the year. Apart from the renewed optimism about the US recovery and fading concerns about Europe; decline in demand from China and India also weighed on the Gold prices. China and India are the two main consumers of gold generating 55% of global jewelry demand and 49% of total global demand for gold.

Gold demand in India is expected to come down this year as the Government recently doubled the import duty on the metal from 2% to 4% and also imposed a levy on unbranded jewelry, as measures to cut the country’s current account deficit. Concerns about the slowdown in China have already been affecting the prices.

Despite these concerns, the long term outlook for the gold remains positive. Continued loose monetary policies by the central banks have led to rise in inflationary expectations in many countries. The real interest rates are already negative in many parts of the world. Though inflation does not appear to be a pressing concern in the U.S. as of now, the situation may change if the oil prices continue to rise. Rising oil prices may also hurt economic recovery as they affect the business and consumer spending.

Over the longer-term, the demand from India and China is expected to grow as the middle class in these countries prefer gold as a store of value. Expanding middle class in these countries and their growing spending power will continue to generate a significant proportion of gold’s worldwide consumer demand.

The global financial system still remains fragile and the sovereign debt problems in Europe are far from resolved. Any escalation of the European debt crisis or political risks resulting from the tensions in the Middle East could push gold higher.

Also, though gold prices have been going up in the past decade, global mine production has not increased much during the same period and is also likely to stay stagnant in the coming years.

Further, purchases by central banks, in particular from the emerging countries, have soared in recent years and this trend is expected to continue.  According to World Gold Council, central banks continued the trend established in 2010 of being net buyers of gold in 2011 also. There are growing concerns about the credit quality of sovereign debt, which increases the appeal of gold for the official reserves managers.

Apart from the attractive return potential, gold is a valuable asset due to its diversification potential.  Diversified portfolios result in superior risk-adjusted returns over long-term periods. 

Buying physical metal provides direct exposure to the asset class but comes with its own problems, while the gold ETFs provide a cost efficient and secure way to invest.  Gold ETFs are also preferred by the investors over the gold mining stocks, which may be subject to geopolitical risk, rising costs, labor problems or mining accidents.

We prefer the physically backed ETFs over the ones which use futures to provide exposure to the commodity.

SPDR Gold Trust (GLD)
GLD is the largest, most liquid and widely traded gold ETF. It seeks to replicate the performance of the gold bullion net of expenses and each share represents 1/10th of an ounce of gold. The fund is backed by physical holding of gold bullion in London vaults. Gold is sold on an as-needed basis to pay the Trust's expenses and as a result, the amount of gold represented by each share will be reduced over time. This ETF has an expense ratio of 0.40% per year and has returned 6.28% year-to-date.

iShares Gold Trust (IAU)
IAU presents a much cheaper option to GLD with its expense ratio at 0.25% per year. Each share of IAU represents about 1/100th of an ounce of bullion. The shares are backed by gold, held by the custodian in vaults in the vicinity of New York, Toronto, London and other locations. The fund has returned 6.37% year-to-date. Though more expensive, GLD has ten times the assets invested and is thus much more liquid than IAU, resulting in slightly lower bid-ask spreads.

ETFS Physical Swiss Gold Shares (SGOL)
SGOL is a relatively new product in this space, started in September 2009. Its main selling point is that its gold bullion is held in the vaults of Zurich, Switzerland. Like GLD, each share of SGOL represents 1/10th of an ounce of gold. But compared to GLD and even IAU, it is much less liquid, which may be reflected in high bid-ask ratio. With an expense ratio of 0.39% per year, SGOL does not offer any cost advantage also. So, unless you are worried about any risk to the safely of gold held in New York or London vaults, there is no reason to prefer SGOL over the other two. This ETF has returned 6.25%, which is in-line with the performance of GLD and IAU.

 
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