New Gold ETFs To Find Gold At Crossroad

February 11, 2014

New funds from Dennis Gartman and Axel Merk meet a gold-ETF market that’s giving off mixed signals.

Gold has had a nice run so far this year, rising more than 7 percent, after suffering its worst annual performance in more than three decades in 2013. Unsurprisingly, gold ETFs are rallying as well, but it’s unclear whether investors are ready to buy into funds like the SPDR Gold Shares (GLD | A-100) as well as a slew of five new gold-focused ETFs arriving on the market.

In fact, continuing outflows from the market’s biggest gold ETFs may actually suggest otherwise. These new gold ETFs—four that launched today and a fifth expected perhaps before the end of February—may end up faltering out of the starting gates.

After all, GLD bled more than $25 billion in assets last year—about a third of its size coming into 2013—and has continued to lose assets this year, albeit at a slower pace, despite the positive performance. The same is true of GLD’s main competitor, the smaller and cheaper iShares Gold Trust (IAU | A-99). Year-to-date, investors have yanked $33 million, and $15 million, respectively, from the two ETFs, even as they race higher in price.

The current gold rally has two main drivers: the U.S. economy and emerging markets. There remains significant slack in the jobs market and the housing market seems to be slowing—two factors that augur well for the yellow metal’s price. On the other hand, the Fed has had an ongoing challenge spurring inflation, which undercuts gold's long historical role as a store of value.

But at the same time, strong demand in China and other emerging markets is also helping support prices, Sumit Roy, Hard Asset Investor’s commodities analyst, told ETF.com.

“Strong [China and emerging market] demand may offset the pullback in demand from the Western investor, pushing gold even higher from here,” Roy said. “The yellow metal is often seen as the ultimate safe haven in many emerging markets, something that is sorely needed given the recurrent currency crisis we see in many of those countries.”

It’s in this conflicted context that Bethesda, Md.-based AdvisorShares rolled out four new gold ETFs this week, three of which are double-plays on specific currencies that carry the brand of legendary commodities trader Dennis Gartman behind them. They invest in various gold-related instruments, including futures through a unit based in the Cayman Islands, according to the prospectus.

Also, currency expert Axel Merk of Palo Alto, Calif.-based asset management firm Merk Funds plans in the coming weeks to bring to market the ETF “OUNZ,” which will be the first to offer investors of any size the option to redeem their shares for bullion.

GLD_IAU_YTD_Performance

Chart courtesy of StockCharts.com

For now, we know that gold ETF holdings are still trending lower, even if just slightly.

So far this year, they have fallen nearly 1.5 percent to 55.9 million troy ounces. To put that number into perspective, gold ETF holdings started 2013 at a record high level of 84.6 million ounces, but ended the year at 56.7 million ounces—the largest decline ever, according to Hard Asset Investor's data.

It’s an open question as to whether the five new gold plays coming to market in 2014 will be able to attract buyers at a time when existing gold ETFs are struggling to attract new investor dollars.

None of the new ETFs is particularly cheap, either.

 

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