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Gold ETFs Return With a Vengeance

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Gold ETFs Return With a Vengeance
Source: Bloomberg Source: Bloomberg

For years, the exchange-traded fund market for gold has been among the worst-performing sectors of the financial markets. Thanks to gold rallying anew, these ETFs have finally returned to form, so to speak. After bullion prices surged through the first six weeks of 2016, improved investor sentiment regarding the yellow metal has driven fresh funds into gold-backed ETFs.

Short Squeeze

For months—and, realistically for several years—one of the surest bets you could make was to short one of the various gold ETFs, such as the ETFS Physical Swiss Gold Shares (NYSE:SGOL), iShares Gold Trust (NYSE:IAU), and the largest gold ETF the SPDR Gold Shares (NYSE:GLD).

For the better part of 4-and-½ years, this was a trade that couldn't lose. The gold ETFs became a proxy for all of the rampant negative sentiment surrounding gold and precious metals in general. Before the rally to start 2016, gold prices had lost more than 20% over that period—and, actually, were down more than 40% from their 2011 high.

Source: Yahoo! Finance 5-year gold ETF price chart. Source: Yahoo! Finance

As the chart above shows, based on percentage gains, these three funds have traded in lockstep for the past five years. Their price movements exactly mimic one another—it's just a matter of which price level an investor is comfortable with, and which fund administrator they trust most. While there are leveraged gold ETFs that return 2x or 3x the price movements of the gold price, you could technically accomplish this same leverage by owning shares of all three of the above funds.

Rapid Turnaround

Traders seemed to take for granted that gold prices would ever consistently rise again. Like any market, this constant pressure from short-sellers created a self-fulfilling prophecy that drove prices lower and lower. The gold bulls were simply outnumbered, and couldn't push back with much oomph.

Yet this meant that when the yellow metal began to pile up the gains in January and February, the majority of traders with positions in GLD, SGOL, and IAU were caught in a short squeeze. At a certain point, the bulls took control and momentum swung the opposite direction, forcing these bears to cover their shorts and support higher prices. Last week, gold ETFs rose better than 4%, their best one-week showing since March 2009. Moreover, the 5-week inflows from the start of January are the best since 2011. GLD alone has seen $1 billion of inflows so far this year.

3-month gold ETF price chart. Source: Yahoo! Finance 3-month gold ETF price chart. Source: Yahoo! Finance

Closely related, gold futures are also coming off of their best week since August. The CFTC reports that hedge funds have piled into gold futures as momentum has built. Already this week, futures prices notched an 8-month high near $1,200/oz. After the spot gold prices lost 10% over the course of 2015, the heavy investment inflow into gold-backed ETFs has helped lift the spot gold price an impressive 12% thus far in 2016.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

About the Author

Everett Millman

Everett Millman

Analyst, Commodities and Finance
Managing Editor

Everett has been the head content writer and market analyst at Gainesville Coins since 2013. He has a background in History and is deeply interested in how gold and silver have historically fit into the financial system.

In addition to blogging, Everett's work has been featured in CoinWeek, Advisor Perspectives, Wealth Management, Activist Post, and has been referenced by the Washington Post.

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