Gold is Now the Hottest Trade: ETFs to Add More Shine

Gold price skyrocketed near six-year high, topping the key level of $1,400 per ounce for the first time since 2013. Notably, Comex gold has gained almost $90 so far in June. With this, the gold futures market is on track for 6.5% gain in June after 1.6% rise in May. This would represent the best back-to-back monthly gains after the January-February 2017 period, when it rose more than 8% in total (read: ETF Winners & Losers Post Fed Meet).

The rally was primarily driven by the Federal Reserve, which has signaled interest rate cuts as soon as next month. Lower rates will continue to weigh on the dollar against the basket of currencies, raising the yellow metal’s attractiveness as it does not pay interest like fixed-income assets.

Additionally, the prospect of easing money policies from other major central banks also boosted the yellow metal. The combination of falling yields, global growth concerns and geopolitical tensions spurred demand for safe-haven assets, pushing up the price of gold. This is because gold is considered a great store of value and hedge against market turmoil. Gold has also been boosted by rising Middle East tensions after a U.S. drone was shot down by Iran's Revolutionary Guard this week (read: Iran Downs U.S. Drone: Sector ETFs & Stocks to Gain).

Given the bullish backdrop, Citigroup expects the metal to reach $1,500-$1,600 per ounce in the next 12 months, and $1,500 by end-2019. Further, the ultra-popular SPDR Gold Trust ETF GLD, with an asset base of around $35.9 billion and an average daily volume of around 7.8 million shares, has pulled in around $886 million in capital so far this month.

In such a positive scenario, the appeal of gold ETFs is increasing. As a result, investors who are bullish on gold right now may want to consider a near-term long on the precious metal. Fortunately, with the advent of ETFs, this is quite easy as there are many options for accomplishing this task. Below, we highlight them and some of the key differences between each:

ProShares Ultra Gold ETF UGL

This fund seeks to deliver twice (2x or 200%) the return of the daily performance of gold bullion in U.S. dollars; the gold price is fixed for delivery in London. The product makes a profit when the gold market moves upward and is suitable for hedging purposes against rising gold prices. The product charges 95 bps in fees a year and has amassed $83.7 million in its asset base. Volume is light at around 70,000 shares per day (read: Gold Surges to 14-Month High: ETFs to Tap).

DB Gold Double Long ETN DGP

This ETN seeks to deliver twice the return of the daily performance of the Deutsche Bank Liquid Commodity Index Optimum Yield Gold. DGP initiates a long position in the gold futures market, charging 75 bps in fees per year from investors. It has accumulated over $96.8 million in its asset base so far and trades in average daily volume of 26,000 shares.

VelocityShares 3x Long Gold ETN UGLD

This product provides three times (3x or 300%) exposure to the daily performance of the S&P GSCI Gold Index Excess Return plus returns from U.S. T-bills net of fees and expenses. The ETN has been able to manage an asset base of $125.9 million, while charging investors a higher fee of 1.35% annually. The note trades in lower volume of around 85,000 shares a day on average.

Bottom Line

It is clear that buying pressure has been intense for gold and that the recent trend is extremely favorable for the commodity given negative global sentiments and a dovish Fed. Additional buying could be in the cards if the United States and China fail to strike a deal later this week and send the stock market into a tailspin. This situation will compel investors to remain focused on precious metals as a store of wealth and hedge against market turmoil.

However, investors should note that since the above-mentioned products are extremely volatile, these are suitable only for traders and those with high-risk tolerance. Additionally, the daily rebalancing – when combined with leverage – may make these products deviate significantly from the expected long-term performance figures (see: all the Leveraged Commodity ETFs here).

Still, for ETF investors who are bullish on gold for the near term, either of the above products could make an interesting choice. Clearly, a near-term long could be intriguing for those with high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world.

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DB GD 2XL (DGP): ETF Research Reports
 
VelocityShares 3x Long Gold ETN linked to the S&P GSCI Gold In (UGLD): ETF Research Reports
 
ProShares Ultra Gold (UGL): ETF Research Reports
 
SPDR Gold Shares (GLD): ETF Research Reports
 
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