Did Gold Blow Another Chance to Regain Its Luster?

Did Gold Blow Another Chance to Regain Its Luster?

After latest failed rally, ETFs may offer opportunities in all market cycles.

Reviewed by: Lisa Barr
Edited by: Ron Day

The discussion for a long time has gone like this: Gold has been and will be the ultimate hedge against tumbling stock and bond markets. Due to its symbolic value and limited supply, it helps fight inflation, diversifies portfolios and serves as something solid in a world of paper wealth.  

Times have changed, with some lately questioning that millennia-old wisdom and declaring gold a has-been. Its decade of failed rallies, combined with the emergence of blockchain technology and crypto currencies render gold no more than a token consideration, in this view. In addition, gold has long been an asset that has attracted a lot of hype and alleged financial “experts” making wild claims and predictions.  

Furthermore, gold is simply a commodity, worth what someone will pay for it, since it produces no earnings or dividends, though gold mining companies do so. But as those stocks tend to be tied closely to gold’s price gyrations, they too are testing investor patience.

Many ETF investors are already familiar with the funds that aim to track gold’s price, and the fact that they tend to differ very little other than the level of their expense ratios. That makes many traditional gold ETFs as much of a commodity as the underlying asset they own.  

So, to potentially jump-start the research process for investors who want to pursue profits using gold as a base concept, but not in its purest form, here are a few ETFs that offer a different take on the gold debate. 

A Different Take on Gold ETFs 

The Credit Suisse X-Links Gold Shares Covered Call ETN (GLDI) is one such fund. This $77 million offering writes one-month call options against a base of gold exposure, with those options struck 3% out of the money. For instance, if gold’s price is $1,900 on the day of the month when the options are set, the calls would be struck at $1,957, 3% higher than the current price. That allows for some upside each month. 

GLDI is aimed at the more patient, income-oriented investor, who willingly trades off some of gold’s volatility in exchange for deriving income out of an otherwise nonincome-producing asset. GLDI has delivered a 7.0% annual total return over the past five years, versus gold’s 8.8% annual rise.  

The Direxion Daily Junior Gold Miners Index Bear 2X Shares Closed (JDST) is a $127 million fund that is approaching its 10-year anniversary. It is a leveraged ETF, so all of the typical risks and anticipated volatility of such funds apply here. It is intended for very-short-term usage.  

For investors who seek a way to profit from intermittent declines in the price of gold, this ETF has a few features that may prompt a look. One is the leverage, and the other is JDST’s focus on junior gold mining stocks. When gold does dip, it is common for gold mining stocks to fall in sympathy. And, the smaller and riskier the mining company, the more downside potential it can have.

JDST can potentially deliver profits in down times for gold. Indeed, it rose by 15% when gold’s price fell by just 2.3% during the three months ended June 27, 2023. Naturally, the opposite is true as well: Gold rallies are JDST’s worst nightmare. 

Gold’s disappointing decade—a series of rallies and pullbacks that led nowhere—doesn’t mean investors can’t take advantage of a growing weakness in investor support for what was once the “gold standard” (pun intended) in inflation, hedging and perceived safety in tough times. ETFs exist to participate in the ups, downs and in-betweens. 

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.