How The Bitcoin Rally Is Impacting Gold ETFs

The bitcoin frenzy has been rattling the markets this year. It is up more than 1,500% so far this year. However, there are increased concerns about the factors driving this rally and if it’s at all sustainable.

Bitcoin Background

There are more than 1,000 crypto currencies being traded currently. However, bitcoin comprises more than 55% of the global crypto currency market capitalization.

The primary debate is on if bitcoin is a currency or an asset. A currency is a store of value. However, the argument on branding bitcoin as a store of value continues owing to its extremely high volatility.

Although bitcoin is similar to a currency because it lacks intrinsic value, critics argue that it is merely a speculative asset. “From what we can identify, the only reason to buy or sell bitcoin is to make money, which is the very definition of speculation and the very definition of a bubble” - Tidjane Thiam, Credit Suisse (SIX:CSGN) CEO.

Easy Access

Chicago Board Options Exchange (CBOE) introduced bitcoin futures contracts. Moreover, the biggest derivatives exchange in the world, Chicago Mercantile Exchange is scheduled to launch bitcoin futures on Dec 18, 2017. Easy accessibility to the cryptocurrency led to a rally in bitcoin futures price, despite bubble warnings. Investors fear a price crash as bitcoin bears can now short the cryptocurrency.

Moreover, two firms have refiled for bitcoin-futures based ETFs which were initially withdrawn as the underlying instruments were not available. According to the SEC public filing system, applications for REX Bitcoin Strategy ETF and REX Short Bitcoin Strategy ETF, as well as VanEck Vectors Bitcoin Strategy ETF have been received again, in the wake of CBOE futures launch.

Impact on Gold

The performance of gold had been relatively strong in the last year, as increasing geopolitical risks made investors shift to safe-haven assets. However, gold price gains seem to have stalled, as investors do not want to be left out of the bitcoin rally. Thus, they are shifting their funds to bitcoin.

"If you add up all the cryptocurrencies and the liquid gold that's in the market right now, the cryptocurrencies in market cap are now 23 percent of the liquid tradable gold," Larry McDonald, head of U.S. macro strategy at ACG Analytics said. "That's up from 2 or 3 percent a year ago, so cryptocurrencies are definitely eating into the gold play."

However, considering the immense volatility of bitcoin, it won’t be a shocker if bitcoin futures start falling and gold starts with its upward trend again.

Let us now discuss a few ETFs focused on providing exposure to gold (see all Precious Metals ETFs here).

SPDR Gold Shares (HK:2840) ETF (V:GLD)

This fund offers physical exposure to gold. It seeks to track the performance of the gold bullion and might turn out to be a cost-efficient way of gaining exposure to the commodity even after accounting for the fund’s expenses.

It has AUM of $33.8 billion and charges a fee of 40 basis points a year. It has returned 7.7% year to date and 6.9% in a year (as of Dec 11, 2017). As such, GLD (NYSE:GLD) carries a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

iShares Gold Trust ETF (AX:IAU)

This ETF seeks to provide exposure to prices of the gold bullion and can be used as a means to attain portfolio diversification or achieve hedging targets.

It has AUM of $9.7 billion and charges a fee of 25 basis points a year. It has returned 7.8% year to date and 7.0% in a year (as of Dec 11, 2017). As such, IAU carries a Zacks ETF Rank #3 with a Medium risk outlook.

ETFS Physical Swiss Gold Shares ETF SGOL

This fund aims to track the performance of the gold bullion before fees and expenses and is a convenient way of gaining exposure to the metal.

It has AUM of $1.0 billion and charges a fee of 39 basis points a year. It has returned 7.7% year to date and 6.9% in a year (as of Dec 11, 2017). As such, SGOL carries a Zacks ETF Rank #3 with a Medium risk outlook.

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