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How to Trade the Gold Rush With ETFs

Gold price has been on wild swings this year. After logging in the biggest quarterly gain in the first quarter since September 2020 on geopolitical tension, the yellow metal saw the worst quarterly performance since the first quarter of 2021 due to the strong dollar and hawkish Fed.

Factors Driving Up Gold Price

This combination of factors is acting as a catalyst for gold price. The ongoing war in Ukraine and 4-decade high inflation have raised the demand for the bullion as a safe-haven asset. Inflation in the United States turned hotter and roared to a level not seen in more than four decades. The consumer price index climbed 9.1% year over year in June to a fresh 40-year high, up from an 8.6% jump in May.

Deteriorating economic conditions and recession fears are also pushing up the price of gold. This is especially true as the world's largest economy is poised for a technical recession as GDP shrank by 0.9% in the second quarter, followed by a 1.6% decline in the first quarter. This might prompt the Fed to scale back its interest rate hiking cycle in fall (read: IMF Cuts Global Growth Forecast: ETF Strategies to Win).

Given the soaring inflation, a worse-than-expected slowdown in China and the ongoing fallout from the war in Ukraine, the International Monetary Fund slashed 2022 global growth for the third time. The agency now expects the global economy to grow 3.2% this year, before slowing further to a 2.9% GDP rate in 2023. The revisions mark a downgrade of 0.4 and 0.7 percentage points, respectively, from April.

All these factors will continue to propel gold prices higher. Gold is often used as a means of preserving wealth during times of financial and political uncertainty. It usually does well when other asset classes struggle. It also acts as an inflation hedge.

Downside Risks

Gold is taking a hit from the strong dollar. The U.S. dollar against the basket of other currencies has been rising in recent months on Fed’s aggressive tightening policy. Higher interest rates would diminish the metal’s attractiveness, thereby weighing on it. The central bank raised interest rates by 75 bps last month in the range of 2.25% and 2.5% to fight inflation and said it is “strongly committed to returning inflation to its 2% objective.”

Given the abrupt changes in gold price and an uncertain outlook, investors should place their bet on gold ETFs cautiously or take advantage of the quick turn in sentiment with the help of leveraged or inverse ETFs.

Gold ETFs

These ETFs might be easier plays for investors seeking to deal directly in the futures market and are the most popular ones.

SPDR Gold Trust ETF GLD: This is the largest and most popular ETF in the gold space, with AUM of $57 billion and an average daily volume of around 6.4 million shares. The fund tracks the price of gold bullion measured in U.S. dollars and has an expense ratio of 0.40%. SPDR Gold Trust ETF has a Zcak ETF Rank #3 (Hold).

iShares Gold Trust IAU: This ETF offers exposure to the day-to-day movement of the price of gold bullion. It has AUM of $28.5 billion and trades in a solid volume of 7.1 million shares a day on average. The ETF charges 25 bps in annual fees (read: 5 Reasons Why Gold ETFs Could Shine Despite Fed Rate Hikes).  

SPDR Gold MiniShares Trust GLDM: This product seeks to reflect the performance of the price of gold bullion. Being a low-cost product with an expense ratio of just 0.18%, GLDM has amassed $5.2 billion in AUM and trades in a solid average daily volume of 4.2 million shares.

Leveraged Gold ETFs

Investors bullish on gold may consider a near-term long on the precious metal with the following ETFs.

ProShares Ultra Gold ETF UGL: This fund seeks to deliver twice (2X or 200%) the return of the daily performance of the Bloomberg Gold Subindex. It charges 95 bps in fees a year and has amassed $213.1 million in its asset base. Volume is good at about 125,000 shares per day.

DB Gold Double Long ETN DGP: This ETN seeks to take a two times leveraged view on the performance of gold. It is based on a total return version of the Deutsche Bank Liquid Commodity Index Optimum Yield Gold, charging 75 bps in fees per year. DB Gold Double Long ETN has gathered $79.4 million in its asset base so far and trades in an average daily volume of 9,000 shares.

Inverse Gold ETFs

Investors who are bearish on gold may want to consider a near-term short with these ETFs:

ProShares UltraShort Gold ETF GLL: This fund seeks to deliver twice (2X or 200%) the inverse return of the daily performance of the Bloomberg Gold Subindex, which reflects the performance of gold as measured by the price of COMEX gold futures contracts. ProShares UltraShort Gold ETF charges 95 bps in fees a year and has amassed $26.2 million in its asset base. Volume is light at a moderate 74,000 shares per day.

DB Gold Short ETN DGZ: This ETN creates a short position in the Deutsche Bank Liquid Commodity Index Optimum Yield Gold, which is intended to track the short performance of a single unfunded gold futures contract. It has accumulated $3.6 million in its asset base and is the illiquid option, trading in a volume of 2,000 shares a day on average. DB Gold Short ETN charges 75 bps in fees per year (see: all the Inverse Commodity ETFs here).

DB Gold Double Short ETN DZZ: This ETN provides investors with a cost-effective & convenient way to take a short leveraged view on the performance of gold. It is based on a total return version of the Deutsche Bank Liquid Commodity Index Optimum Yield Gold. With AUM of $5.7 million, DB Gold Double Short ETN trades in average volume of roughly 16,000 shares per day and charges 75 bps in fees per year from investors.


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SPDR Gold Shares (GLD): ETF Research Reports
 
iShares Gold Trust (IAU): ETF Research Reports
 
ProShares Ultra Gold (UGL): ETF Research Reports
 
DB Gold Double Long ETN (DGP): ETF Research Reports
 
DB Gold Double Short ETN (DZZ): ETF Research Reports
 
DB Gold Short ETN (DGZ): ETF Research Reports
 
ProShares UltraShort Gold (GLL): ETF Research Reports
 
SPDR Gold MiniShares Trust (GLDM): ETF Research Reports
 
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Zacks Investment Research