Golden Days Return for Gold, Bullion ETFs

It was only a matter of time before and the popular exchange traded funds backed by the yellow metal resumed delivering for clients.

As has been widely noted, the yellow metal was an abject disappointment in 2021, slumping as inflation and the broader commodities surged. Inflation persists, indicating gold is finally working against a backdrop that's often favorable for it. Of course, advisors should impart upon clients that the crisis in Ukraine is playing a pivotal role to driving gold and gold ETFs to the upside.

Something else advisors should note to clients is that the gold is soaring as the dollar does the same. That's something of a rarity, though not improbable, because gold, like other commodities is denominated in dollars. On March 8, the ICE U.S. Dollar Index, which tracks the greenback's movements against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc, soared to a 52-week high as a slew of gold ETFs did the same.

With those factors and more in mind, it's reasonable to expect more clients will be inquiring about gold and how the commodity can be implemented in portfolios.

Momentum Building for Gold ETFs

Since the debut of the SPDR Gold Trust (NYSE:GLD) nearly 18 years ago, clients have largely embraced the idea of accessing gold via the ETF wrapper. That makes sense as a fund like GLD keeps them out of the volatile futures market and erases the need for physical storage, which costs money.

Due in large part to the aforementioned factors, momentum is again accruing to gold ETFs and it might just be getting started as far as 2022 is concerned.

“Global gold ETFs drew net inflows of 35.3t (US$2.1bn, 1.0% of AUM) in February. Positive flows were almost evenly split between North American and European funds, continuing the year-to-date growth in Western markets and considerably outweighing outflows from Asia,” according to the World Gold Council (WGC). “Global net inflows were driven by stubbornly high inflation and a surge in geopolitical risk on the back of the Russian invasion of Ukraine, which pushed the gold price to an intra-month high of US$1,936/oz.”

February was the best month for spot gold prices since last May – not surprising when factoring Russia's invasion of Ukraine into the situation. Data confirm professional traders are bullish on bullion.

“Net long positioning, via the recent Commitment of Traders (COT) report for COMEX gold futures, initially declined before steadily rising to 904t (US$56bn) – the highest level since July 2020 – as gold price performance was robust,” adds the WGC.

Why Gold ETFs Matter

Alright, so that last data point is fine and dandy, but it's not likely to mean to much to clients. Here's something that will be meaningful to them: Correlations.

What's meant there is that many commodities ETFs aren't as intimately correlated to the spot price action of the underlying commodity as clients are led to be. Gold ETFs are the exception in a positive way.

“We calculate the correlation of gold ETFs to the gold price, which highlights a correlation of almost 1 for all 11 ETFs in our universe,”  notes Nicolas Rabener of Factor Research. “In contrast to oil ETFs, an investor can use these instruments for getting exposure to gold with fewer concerns. Some of these are also backed by physical gold rather than gold futures, which likely creates additional comfort to investors seeking an easy and economical way to invest in the metal.”

That's good news for clients longing for gold exposure via ETFs.

Related: Let Freedom Ring with This ETF