GLD and Gold’s Selloff

Gold has suffered a rough couple of months, getting pounded below major support. One driver was stock-market capital flowing out of gold again, as evidenced by renewed differential selling pressure seen in gold-ETF shares. But this was minor compared to last year’s, despite extreme bearish sentiment plaguing gold. Gold-ETF selling exhaustion has effectively been hit, paving the way for big rebound buying.
The dominant gold ETF remains the American SPDR Gold Shares, which trades as GLD. This vehicle revolutionized gold trading for stock investors, creating a quick and efficient conduit for the vast pools of stock capital to migrate into and out of gold. And since GLD just celebrated its 10th birthday this week, it’s a great time to take another look at it. Starting from humble beginnings, GLD has matured into a gold juggernaut.
If you weren’t following the precious-metals realm back in the early 2000s, it’s hard to even imagine how different the pre-gold-ETF era was. Before GLD’s introduction in mid-November 2004 kicked it off, stock traders had no easy way to prudently diversify part of their portfolios into gold. Their only options were selling stocks to buy physical gold coins, trading gold futures, or buying gold-miner stocks as a gold proxy.
But for pure stock traders, all these posed real problems. While physical gold is awesome, buying coins is an inefficient and expensive process riddled with high premiums. Gold futures are a highly-leveraged and exceptionally-dangerous game most stock traders avoid like the Black Death. Though gold stocks can be wildly profitable, they are far riskier than gold itself due to an array of serious operational risks.
The gold ETFs led by GLD gave stock traders a cheap and easy way to bypass all these alternatives to gain direct gold-price exposure. GLD held physical gold bullion in trust for its shareholders. And all it took to buy GLD shares was a mouse click and trivial trading commissions. And even with GLD’s 0.4% annual management fee, it is still far cheaper than gold coins given the high premiums they command.
GLD was created specifically for American stock investors by the World Gold Council, the industry group funded by the world’s biggest and best gold miners. It was never intended to replace physical gold for investors, but to open up gold investing to stock traders who would never or could never (due to legal restrictions like in mutual funds) buy gold coins. Despite the silly conspiracy theories, GLD has been a great success.

This post was published at ZEAL LLC on November 21, 2014.