The first gold ETF was launched in 2003. Since then, ETFs have revolutionized the gold market. How? And, by the way, what is the relationship between gold and climate change?
Gold-Backed ETF
Due to all the current news and developments, we didn’t have time to analyze the few reports which the World Gold Council has recently published. In this edition of the Gold News Monitor, we fix that error and discuss no less than three WGC reports.
When it comes to the first publication, i.e., the report ongold-backed ETFs, the organization argues that these investment instruments have transformed the gold investment market, as they:
reduced total cost of ownership, increased efficiencies, provided added liquidity and access, and brought new interest in – and demand for – gold as a strategic investment.
Indeed, there are many benefits of investing in gold-backed ETFs. First of all, the market is large and liquid, so they often have lower management fees than managed gold funds. In that way, the gold-backed ETFs allow retail investors to gain exposure to gold at low cost, making investing in gold much easier. As they offer economies of scale, gold ETFs enabled smaller investors to buy gold through financial markets. In other words, the possibilities of investing in gold have significantly broadened over the past 15 years. It’s really a great development!
ETFs have even more positive characteristics: lower management fees, lower price premiums, elimination of separate storage costs, standardized quality and security, liquidity, increased operational efficiency and transparency, lower tracking error, and reduced counterparty risk.
How do ETFs work? When investors purchase shares in a gold-backed ETF, they buy a portion of the physical gold that the fund holds. And the goal of gold ETFs is to closely track the price of the yellow metal. As one can see in the chart below, they do their job pretty well.
Chart 1: Price of gold (yellow line, right axis, London P.M. Fix) and the price of the SPDR Gold Trust (P:GLD) (red line, left axis, closing prices) from December 2004 to February 2015.
However, it’s worth remembering that, as we explained in the April 2016 edition of the Market Overview, the ETFs’ inflows and outflows do not drive the price of gold, but are driven by the changes in gold prices.
Tackling Long-Term Global Investment Challenges
In another report, summarizing the Investment Summit, the WGC analyzes major shifts in relation to long-term investments. In particular, they examined: the macro-economic prospects for the U.S. and China, global investment challenges, the evolution of responsible investing, crypto-assets and the Blockchain; the long-term global economic outlook, and the likely direction for gold over the next 30 years.
So, as China’s economy is maturing, the economic power is shifting from the West to the East, which – according to the WGC – should have a positive impact on the gold market. And global investors face almost unprecedented challenges, such as historically low levels of bond yields. The report also touches on cryptocurrencies and gold. It lists many differences: gold is a well-known, highly liquid investment toot; gold exhibits relatively little volatility; gold trades in an established regulatory framework; the supply of Bitcoin is finite and designed to diminish gradually up until 21 million, while the gold supply increases year-on-year, albeit gradually; gold is widely appreciated as an effective safe haven during times of stress. Another difference, pointed out by Alan Greenspan, is that Bitcoin is like other fiat currencies because Bitcoin is not backed by any valued commodity. We agree that Bitcoin is not a commodity currency (like gold), but it is not like other fiat currencies, as it is not issued by a government (or a central bank) and its supply cannot be changed arbitrarily.
Gold and Climate Change
Yes, you read it well! The WGC indeed wrote a report on the link between gold and climate change. Actually, it has 40 pages! The justification is that “many investors are keen to understand the potential climate change impacts of their assets,” including gold. The main findings are that total greenhouse gas emissions from gold are significantly lower (especially when looked at per U.S. dollar value) than other major products sourced primarily from mining, such as steel, aluminum and coal. Thus, investment in gold may help reduce the carbon footprint of an investment portfolio, which should be welcomed by environmental activists. Moreover, gold itself may play an important role in technologies that help facilitate a transition to a low carbon economy, so owning gold may reduce the investors’ exposure to climate change risks.
The three analyzed reports don’t provide investment clues, but they offer some interesting insights into the fascinating world of the precious metals. In the next edition of the Gold News Monitor, we will analyze more market-related issues, such as Powell’s congressional testimony. Stay tuned!
Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.