How to invest in gold through ETFs available in the US stock market?

If you are an Indian investor looking to invest in gold or silver, you can do so through the Indian market by investing in digital gold products or mutual funds. But if you are interested in investing in gold through the US stock market, you can do so through ETFs.

Before we dive into the different gold or silver ETFs, let’s briefly discuss why the prices of these two precious metals have rallied in recent months. Prices for gold and silver have rallied in recent months.

This is due to several factors:

Fear of debasement: Debasement occurs when a currency loses its value. Due to the unprecedented stimulus package (e.g. money printing) by both the US and EU in response to the COVID-19 induced recession, many are concerned that the real value of the global reserve currencies (USD and Euro) will decline. Typically, the real value of currency goes down when there is an increased supply of the currency. These stimulus packages have the effect of increasing the money supply. As you can see in Figure 1 below, the supply of USD (M3) has jumped by 16% since the US introduced different phases of its stimulus package – this is the fastest increase observed over a four month period dating back to 1960.



Figure 1: Supply of money (M3, which include cash, checking deposits, savings, large time deposits, institutional money market funds, short-term repurchase agreements and larger liquid assets). Organization for Economic Co-operation and Development, M3 for the United States, retrieved from FRED

The last time the US released a large stimulus package (to counter the great recession of 2007 to 2009), gold rallied (Figure 2).

 

Figure 2: Returns of Gold ETF (GLD) vs. S&P 500

Fear of inflation: However, while debasement in many cases leads to inflation, this is not always the case as we have witnessed over the past decade. Inflation will follow the increased money supply only when the demand for goods and services have returned to their previous level (despite the increased money supply, if no one is spending the cash, prices of goods and services will not increase). Therefore, it is likely that in the near term (the next 1 to 2 years), the level of inflation is likely to be low/moderate. The recovery of demand for goods and services will lead to a full economic recovery, and that is unlikely to occur until we have a vaccine at a global level.

Imbalance in supply and demand: In the case of silver, about 50% of global silver demand is from the car and solar industries. With the global lockdown, demand from these sectors weakened initially, leading to mines closing, and causing supply restrictions. However, the prospect of industrial reopening, combined with investors’ rush to buy silver and increased demand from electronics and solar panels manufacturers have contributed to the recent rally.

How to invest in gold and silver through the ETFs available through the US stock market

You can gain exposure to these precious metals by ETF investing through the US stock market via two methods:
Invest in ETFs that are backed by physical gold/silver

• Invest in ETFs that are backed by physical gold/silver
• Invest in ETFs that invest in companies that produce gold/silver

Investing in gold and silver through ETFs

One of the most cost effective ways to invest in gold is through ETFs that are backed by physical gold. By investing through gold ETFs, investors do not have to incur the buying, storing and insuring of physical gold. Two of the largest gold ETFs are GLD (SPDR® Gold Shares) and IAU (iShares Gold Trust).

Table 1: GLD vs. IAU

	SPDR Gold Shares (GLD)	iShares Gold Trust (IAU)
Net Assets	US$66.9 billion	US$25.91 billion
Average Volume	11,916,834	24,502,210
Inception Date	2004-11-18	2005-01-21
Net Expense Ratio	0.40%	0.25%

Note: As of August 1st 2020

Similar to the aforementioned gold ETFs, there are also ETFs that offer fractional ownership of physical silver through the ETF structure. The largest ETF of this kind is SLV (iShares® Silver Trust).

Table 2: SLV ETF

	iShares Silver Trust (SLV)
Net Assets	US$8.88 billion
Average Volume	36,907,459
Inception Date	2006-04-21
Net Expense Ratio	0.50%

Note: As of August 1st 2020

Investing in gold and silver through mining ETFs

An alternative method of investing in gold and silver is to invest in companies that mine these precious metals. There are several ETFs that have made this process simple. These ETFs invest a majority of their funds in common stocks and depository receipts of companies involved in either the gold or silver mining industry.

Typically, investments in these ETFs have a higher beta than investing in physically-backed ETFs directly because investments in these companies can be affected by the individual performance of companies within the ETF (and not just the demand of the underlying gold or silver). This means that they have higher volatilities but also potentially higher returns.

Figure 3 shows the performance of YTD returns between Gold Miners ETF (GDX) vs. Gold backed ETF (GLD) vs. S&P 500. When you look at the difference between the Gold Miners ETF compared to the Gold backed ETF, the Miners ETF exhibits much higher volatility; it declines much larger during between March to April, but has rebounded higher as the price of gold increased.

Figure 3: Year to date returns of Gold Miners ETF (GDX) vs. Gold backed ETF (GLD) vs. S&P 500

Although we use GDX as an example of Gold Miners ETF, there are several ETFs that are focused on investing in companies involved in mining and other aspects of gold production. Two of the largest are VanEck Vectors Gold Miners ETF (GDX) and VanEck Vectors Junior Gold Miners ETF (GDXJ). These two have different constituents, and therefore may have differing return profiles. See Table 3 to see how they compare.

Table 3: GDX vs. GDXJ