Gold ETF Returns Show Huge Disparity

April 19, 2013


Gold miner ETFs have clearly been hit the hardest in gold’s recent drawback, while physically backed and futures-based strategies fared much better, although still poorly.

In a discussion about gold miner ETFs, my colleague Dennis Hudacheck quippingly remarked that those holding gold miners ETFs are in a paradoxical situation, where those products have lost a quarter of their value at a time when equity markets are at all-time highs. What happens if equity markets tank?

Still, the argument can be made that these securities would perform strongly in a falling equity market, although historically, the results have been mixed.

In gold’s recent downturn, equity markets also performed poorly, so it seems gold miner ETFs have gotten the worst of both worlds, simultaneously exhibiting characteristics of commodities and equities. In other words, with both markets headed downward, the effects were compounding for gold miner ETFs.

So if gold rebounds and equity markets head upward, will gold miners outperform? Maybe, but not necessarily. Again, gold miner equity ETFs display characteristics of both equities and commodities, adopting strong correlations to either market over various time horizons.

On the other hand, the physically backed strategies such as the iShares Gold Trust (NYSEArca: IAU) and futures-based strategies such as PowerShares’ DB Gold Fund (NYSEArca: DGL) tend to perform similarly over most time horizons and, in general, both track the price of gold fairly consistently.

Going With A Specialty Approach

There’s also two specialty gold ETFs that are worth discussing here: Credit Suisse’s Gold Shares Covered-Call ETN (Nasdaq: GLDI) and RBS’ Gold Trendpilot ETN (NYSEArca: TBAR).

GLDI writes covered calls on a physically backed gold ETF, the SPDR Gold Trust (NYSEArca: GLD). The idea is to provide regular income from the premiums received on call options. The consequence of this strategy is that you’ll miss out on any gold rally more than a couple percentage points because you sold your upside in the form of a call option.

Thus, with GLDI, upside is limited and your only downside protection is the premium received on the call options, which doesn’t provide much cushion when markets turn down sharply. Sure enough, GLDI performed very similarly to physical gold products: It declined 11.92 percent from April 11 to April 16.

TBAR, on the other hand, tracks the spot price of gold when it is at or above its 200-day moving average for five consecutive business days, and 3-month Treasurys when it’s not. In other words, the ETN tries to track gold when it looks strong by technical measures and switches its exposure to government T-bills when gold is technically weak.

In the recent downturn, this strategy performed as advertised on the tin—gold was below the ETN’s threshold; thus, TBAR was tracking T-bills and was resilient in the downturn: The fund actually gained 0.02 percent from April 11 to April 16.

Unfortunately, this has been TBAR’s only true test since its launch two years ago, so we can’t be certain yet that its methodology will provide the same level of protection ahead.

Ultimately, investors ought to select the gold ETP that matches their risk and return objectives the best.

At the time this article was written, the author held a long position in ETFS' Physical Asian Gold Shares (NYSEArca: AGOL). Contact Spencer Bogart at [email protected].

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