History Not On Side Of 2016’s ETF ‘Gold Rush’

June 28, 2016

Working in San Francisco off of Sutter Street, I’m frequently reminded of John Sutter, “credited” with discovering gold in 1848 at the sawmill he was building along the American River near what today is Sacramento.

That, as we all know, triggered the great California gold rush. But what many may not know is that the gold rush ended badly for Sutter, as well as for hundreds of thousands of others.

The term “gold rush” sounds exciting and potentially lucrative, and in the “1849 gold rush,” that was certainly true for some, but not for the very large majority of the 300,000 gold prospectors who came to California. Rather, it was the people who sold products, supplies and services to the swarm of “forty-niners” intent on finding their pot of gold who made the lion’s share of wealth.

Even for Sutter, whose construction crew supervisor John Marshall actually “discovered” the specs of gold floating in the mill’s water channel, the gold rush ended badly. He was more intent on finishing his mill than exploiting the riches at his feet. Blind to what was in front of him, Sutter compounded that mistake by allowing his workers to prospect for gold on their time off.

Soon his land and newly built sawmill were overrun with prospectors when word got out after his workers went to San Francisco to cash in. Any gold he might’ve found did not make up for his loss of land, and his business that never got off the ground.

Sutter eventually died penniless despite the riches that once floated at his feet. Marshall also met financial demise when he invested in a failed gold mine after the gold rush. He also died in poverty.

Sutter’s and Marshall’s fate were like nearly all the prospectors who risked everything only to come up dirt poor.

The First 21st-Century Gold Rush

Fast-forward 149 years, and a new gold rush was about to explode, but instead of picks and axes, gold prospecting in the 21st-century would be about clicks and asks/bids.

On Nov. 12, 2004, the first globally available gold rush began, meaning it wasn’t isolated to one geographical area like California. On that date, the SPDR Gold Trust (GLD | A-100) launched, which introduced many more of the global investing masses to this a new type of investment vehicle, the exchange-traded fund, and to a new way to access gold.

In less than a week, the physically gold-backed GLD attracted $1 billion, making it to this day the most successful ETF launch. But this was nothing compared with what was about to come. Seven years later, this gold rush peaked, as GLD became the largest ETF in the world, even outranking the SPDR S&P 500 ETF (SPY | A-97), with $76 billion in assets and record share price as spot gold hit $1,900. But fate, or maybe the specter of the California gold-rush bust, came a-haunting.

Shortly after that date, the seven-year-old gold rush began its transformation into a gold bust. California’s gold rush lasted seven years as well: 1848-1855.

Soon after gold prices hit their peak, a long slide down the mountain began, with GLD losing more than $55 billion in assets along the way, to a new recent low price on Dec. 17, 2015, of $100.8, as spot gold closed at $1,051/oz.


The 2016 Gold Rush Or Gold Crush?

What’s interesting about the chart above is how GLD’s gold holdings (a proxy for inflows) and the share price of GLD (a proxy for spot gold) walk hand in hand. You could argue that the buying of gold ETFs had a major impact on boosting gold, just as the selling of gold ETFs after the 2011 peak helped push the yellow metal to its recent depth last December.

Clearly, the Fed’s three quantitative easing programs made gold appealing as Treasury yields retreated during the run-up, but the influence of GLD and other physically backed gold ETFs also were clearly a new fundamental.


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