This ETF Changed the World in 7 Years


Seven years ago to the day, a new vehicle for gold launched straight into stardom and became the dominant means by which investors have gained exposure to the best-performing asset class of the last decade: gold.

The SPDR Gold Trust (NYSE: GLD  ) -- known colloquially as "the GLD" -- has seen its reported gold holdings explode from just 0.26 million ounces at inception, to a meaningful stash of 41.86 million ounces seven years later. Thanks to the explosion in the price of gold that corresponded with its rise in popularity, the fund's net asset value grew from $115 million to a whopping $72.2 billion. The GLD, then, is worth some 59% more than Goldman Sachs (NYSE: GS  ) !

With 41.46 million ounces (1,289.46 tonnes) in reported holdings, the GLD lays claim to more gold bullion than the combined (reported) sovereign holdings of India, Saudi Arabia, and the United Kingdom combined! The holdings equate to nearly one-half of all the gold mined in the world during 2010.The fund has further to climb, however, before matching the 140 million ounces of reserves held by the world's largest gold miner: Barrick Gold (NYSE: ABX  ) .

Altering the landscape for gold investment
Although several exchange-traded bullion proxies were available prior to the launch of the GLD, no other vehicle has come close to capturing the attention -- nor the market share -- that the SPDR Gold Trust has commanded over recent years. The reported holdings of the iShares Gold Trust (NYSE: IAU  ) , at just 5.26 million ounces, simply do not compare. When billionaire investors from John Paulson to George Soros go for the gold, they go for the GLD.

Before these sorts of bullion proxies hit the stage, gold investors typically took possession of physical bullion and held onto the metal for the very long term. Between transportation and storage costs, the asset did not lend itself well to the whims of short-term traders, with futures markets offering essentially the sole exception. With the advent of the GLD and similar vehicles, short-term speculators and institutional investors alike now have a compelling niche at their disposal that lies somewhere in the void between actual physical possession and leveraged exposure to futures.

As the vehicle increases in scale, so does the imperative for gold investors to track the trust's data for emerging trends in investment demand for gold in the Western world. For example, John Paulson reportedly liquidated approximately one-third of his hedge fund's GLD holdings during the third quarter of 2011. I believe the sales likely stem from a rash of redemptions by clients in the wake of a couple of very rough quarters for the fund, and gold's strong trailing performance makes that holding an obvious target for strategic liquidation. Paulson reportedly sold 11.2 million shares of the GLD during the quarter, or the equivalent of about 1.1 million ounces of gold. A liquidation of that scale is certain to have an effect on gold price. After all, for all the attention it receives, gold remains a surprisingly minuscule market as compared with other asset classes. As gold continues to rise in price and popularity over the years to come -- a scenario that I consider a foregone conclusion -- the exceptional liquidity provided by the GLD will likely remain a conduit for substantial volatility.

Fortunately for gold investors, an incredible surge in central bank purchases of gold during the third quarter served to underpin the gold price in the face of a rallying U.S. dollar and the spate of forced hedge fund liquidations as bullish bets turned sour over the summer. Central banks added a phenomenal 148.4 tonnes of gold during the third quarter, representing a 123% sequential increase over the 66.5 tonnes purchased during the second quarter, and more than 6.5 times the prior-year mark of 22.6 tonnes. The identity of many of those buyers remains a mystery, though I suspect China may be overdue for another public restatement of its official gold holdings. In any event, those 4.77 million ounces in central bank purchases represent the strong bullish hand of willing buyers on the other end of those sudden liquidations by Paulson and others. With central bank gold purchases forecast to continue in earnest, the outlook for gold remains, well ... golden.

A golden record of performance
One would have to have dug pretty deep into a bag of tricks to outperform the GLD over the past seven years of a lost decade for stocks. Thank goodness for Apple (Nasdaq: AAPL  ) , which -- as a result of its broad-based appeal -- likely helped droves of investors to reduce that twinge of regret that gnaws at the heels of those who have eschewed gold exposure thus far. Google (NYSE: GOOG  ) forged a rather legendary trajectory following its IPO mere months before the launch of the GLD, but after today you can search for "GLD outperforms Google," and you'll end up right back here where you can consider the following chart:

SPDR Gold Trust ETF Stock Chart

SPDR Gold Trust ETF Stock Chart by YCharts

Over the seven years since the SPDR Gold Trust entered the fray, the trust has edged out even the rather epic performances logged by celebrated large-cap stocks Google and McDonald's (NYSE: MCD  ) .

I find it interesting to note here, though, that a lesser-known and far-smaller bullion proxy has outperformed even the mighty GLD. I refer to Central Fund of Canada (AMEX: CEF  ) , which I have consistently touted as my own preferred investment vehicle for precious-metals bullion exposure. The fund has been around since 1961, which makes this year, of all things, its golden anniversary. Central Fund of Canada also offers investors a critical promise of "unencumbered" bullion within its prospectus that is not explicitly stated within those of many popular alternatives. Moreover, this vehicle offers a unique mix of exposure to gold and silver, which I believe will prove a driver of even greater outperformance going forward. I encourage Fools to consider billionaire investor Eric Sprott's forecast that "silver is the investment of this decade as gold was the investment of the last decade." For those reasons, I believe Central Fund of Canada remains the bullion proxy of choice for discerning precious-metal investors.

But the greatest outperformers of all, I maintain, will be the miners of gold and silver. After a terrible year thus far in 2011, the mining equities are ludicrously undervalued and poised for substantial outperformance of bullion. I believe bullion exposure remains a core component of any well-structured strategy for precious-metals investment, but at this juncture I recommend an enhanced relative allocation to miners over bullion. I think Primero Mining (NYSE: PPP  ) is about the greatest gold stock in the world, and my top pick for 2011 -- AuRico Gold (NYSE: AUQ  ) -- remains a phenomenal value following a pair of hugely transformative acquisitions.

To mark the occasion of the SPDR Gold Trust's seven-year anniversary, take a moment to share with your fellow readers your strategy and/or selections for precious metal investment to profit from the remaining years of this powerful bull market. Whatever your thoughts on gold bullion or gold miners as an investment, Foolish minds want to know. Please find the comments section below.

Fool contributor Christopher Barker owns shares of Central Fund of Canada, AuRico Gold, and Primero Mining, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Primero Mining, Google, and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Google, McDonald's, and The Goldman Sachs Group. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (39)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 18, 2011, at 5:54 PM, XMFSinchiruna wrote:

    Fascinating ... following up on my quip above, I just googled "GLD outperforms Google", and this article came up in pole position amid the search results.

    You do have to hand it to Google's search engine! :)

    http://www.google.com/search?sourceid=ie7&q=GLD+outperfo...

  • Report this Comment On November 19, 2011, at 1:11 AM, DarthMaul09 wrote:

    In the age of MF Global, the counter party risk of GLD should trigger concern and a move from the paper metal to physical gold.

    GLD's size will likely protect it for a while, since most who invest in GLD are probably looking for a liquid asset that is easily traded. These investors are probably more interested in the price action of the metal and not its intrinsic value to preserve wealth.

    The common thread in large financial failures has been counter party risk. What institution will be next to fail and will the eventual outcome be contagion or a popcorn type of mass default? GLD will not survive that event, gold will.

  • Report this Comment On November 19, 2011, at 4:37 AM, KurtEng wrote:

    "As gold continues to rise in price and popularity over the years to come -- a scenario that I consider a foregone conclusion"

    Statements like this usually make me run in the opposite direction. If an analyst made the same statement about any stock, he would be ridiculed at this point. If it is said about gold, though, no problem.

  • Report this Comment On November 19, 2011, at 8:38 AM, MoneyWorksforMe wrote:

    ^ You are not interpreting that sentence correctly. Rising popularity does not mean the subject--in this case, gold--is already popular. In other words, 1 in 20 people may currently own gold in their portfolio. Sinch expects this fraction to increase over time, due to historically bullish market fundamentals. Additionally, the preceding sentence, "After all, for all the attention it receives, gold remains a surprisingly minuscule market as compared with other asset classes.", makes it very clear that Sinch believes gold, in terms of current asset allocation is far from popular...

  • Report this Comment On November 19, 2011, at 10:13 AM, XMFSinchiruna wrote:

    KurtEng,

    I have laid out the macroeconomic foundations for my long-term bullish outlook on gold through countless articles and blogs over the past 4-5 years. Not every article can be about reiterating the underlying thesis.

    Yes, I have concluded that gold will continue far higher. If that makes you run away from gold, that is a shame. But I see that you began shorting GLD in CAPS in May of last year, so I suspect your mind is already made up on the topic.

    http://caps.fool.com/Pitch/GLD/4923501/gold-has-had-its-run-...

    I see you red-thumbed SLW recently. I urge you to reconsider, and certainly caution you against making any real-life moves of a similar sort.

    I hope someday something will lead you to turn another 180 degrees and run back toward gold. :) Best of luck!

  • Report this Comment On November 19, 2011, at 5:34 PM, KurtEng wrote:

    Sinch,

    I understand your position and I can admit that for some time you have been right about it. I can say that I bought SLV at a good time, made a good profit, and sold it too early. The thing that spooked me about it was that I bought SLV as a hedge against inflation, but the price of silver rose as there was deflation. I have been scared of precious metals from an investment standpoint since then. My feeling is that there is too much optimism in the area after they have had a very good run.

    My worry about precious metal miners is that they are trading at relatively high multiples despite that fact that prices and demand are historically high. I prefer aluminum, coal and steel miners now because earning are depressed by low demand and prices over the last 2-3 years, but there is a high potential upside.

    I use CAPS as a test of my current theories, so a red thumb is to test if I made a mistake not buying a stock or not. I don't have any short positions. So far, my precious metal picks haven't fared well, but I'll keep them open at least for a while and see if things change. I am willing to admit if I make a mistake, and I do still own physical silver (coins) and will buy more at a good price.

    I appreciate your opinion and detailed analysis on the topic.

    Kurt

  • Report this Comment On November 21, 2011, at 10:06 AM, XMFSinchiruna wrote:

    Kurt,

    Thanks for the reply. I'm glad to hear you retain some silver exposure.

    Viewing precious metals exclusively as a hedge against inflation offers an incomplete view of the factors affecting their prices. Under the prevailing macreconomic conditions, precious metals were more properly anticipated to continue higher whether inflation or deflation ruled the day. You are not alone in perceiving that expectation as somewhat counterintuitive, but nonetheless gold and silver investors like myself did voice that forecast repeatedly before it was corroborated by the market.

    The crux of the matter lies in the fact that the policy responses to the threat of deflationary forces are/were explicitly stated, and firmly established by precedent. Deflationary forces not only lead to quantum increases in public debt as policymakers scramble to jump-start growth, but they also raise reasonable questions as to a heavily indebted nation's capacity to service/repay that debt.

    http://www.fool.com/investing/general/2009/06/02/the-top-10-...

    "Of all the reasons to hold gold, the debate over potential scenarios for the onset of inflation remains the most unnecessary obstacle to understanding gold's outlook. We must not let the inflation debate muddy the waters for gold, since frankly, all scenarios are now supportive of gold. Whether you're convinced we'll see runaway hyperinflation, a deflationary spiral, or stagflation, the direction for gold is unaffected."

    http://www.fool.com/investing/general/2011/03/16/dont-flock-...

    "Contrary to Treasury bonds, the anticipated inflationary impact of those monetary policies actually enhances the allure of gold and silver. Should deflation rule the day as some fear possible, then the Fed's proven track record of massive interventions stands as a golden backstop. Critics of gold and silver enjoy teasing the apparent contradiction, but no matter whether Fools seek shelter from inflation or deflation, precious metals offer the rational safe haven."

    http://www.fool.com/investing/general/2009/02/02/the-scaries...

    "However urgent we're told each of the successive expenditures are, I believe that the fundamental unsustainability of this type of spending will result in the declining purchasing power of the U.S. dollar. Whatever your position regarding whether inflation or continued deflation will characterize the road ahead, neither scenario changes the underlying degradation of the dollar as the very perception of the nation's solvency comes into question."

    So, I would argue that getting spooked by gold and silver's resilience in the face of apparent deflationary forces was an improper response. I encourage you to reconsider your stance, and examine the number of existing/looming catalysts for further long-term gains for gold and silver.

    And Kurt, gold and silver miners are not trading at high multiples. If you are comparing mining P/Es to P/Es from other sectors, you are comparing apples to oranges. Please find my explanation here:

    http://www.fool.com/investing/general/2011/06/27/valuation-a...

    Also, coal demand is not low. Have a look at industry outlook discussions from Joy Global and the major producers.

    I hope some of the above perspectives are useful to you. If you ever have any questions, send me an e-mail (sinchiruna@cox.net). Good luck!

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1592156, ~/Articles/ArticleHandler.aspx, 12/18/2014 11:48:43 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement