After a few dull years, gold is attracting attention again as a possible portfolio diversifier.
A sinking stock market, trade conflicts, a government shutdown and a few other uncertainties helped gold outpace equities in 2018. In the fourth quarter alone, Comex gold futures prices rose 7.1 percent. Although the SPDR Gold Shares (GLD), the oldest and biggest bullion-backed ETF by assets under management, lost 1.9 percent in 2018, that was better than the 4.6 percent loss by the SPDR S&P 500 ETF (SPY). On Tuesday, gold futures prices settled at $1,286 an ounce, just off their May 2018 highs, while the S&P 500 is just off its lowest level since April 2017.
Sean Lusk, director of commercial hedging at brokerage Walsh Trading, says gold’s recent turnaround isn’t surprising as investors rethink the need for safe haven investments and portfolio diversification.
“That’s the lesson from the fourth quarter and the massive pullback in equities. I think we’re seeing more interest in diversification,” Lusk says.
Gold outperformed the S&P 500 in 2018, but the yellow metal didn’t start sparkling until September. Rising interest rates and a stronger dollar had weighed on gold, and the strength of the stock market also dulled its shine. Meanwhile, speculators in gold futures had placed bets on weaker prices, and emerging-market demand was soft, according to a December research note from Commerzbank.
When the S&P started to top out in September, that’s when risk-averse investors started to take a shine to gold. The combination of inflows into gold ETFs and gold-futures speculators unwinding bearish bets gave the metal some oomph.
From the beginning of December until Tuesday, both GLD and the iShares Gold Trust (IAU) saw net inflows of $1.495 billion and $463 million, respectively. To put that in perspective, GLD has $32.8 billion in AUM and IAU has $11.7 billion. SPY saw outflows of more than $6.8 billion during that time. Year-to-date, GLD is up 0.23 percent, IAU is up 0.24 percent and SPY is up 2.74 percent as equities rebounded Tuesday.
ETFdb lists 17 ETFs and exchange-traded notes that track spot gold prices. When choosing a gold ETF look carefully at its structure. While GLD and IAU both hold physical gold in a trust structure, some ETFs track gold futures prices. These ETFs are considered commodity pools, which means holders get a K-1 at tax time. Physical gold ETFs are taxed at the collectibles rate, which has a long-term rate of 28 percent.
For advisors considering an allocation to gold for portfolio insurance, the rule of thumb is to keep a position of no more than about 5 percent of the total portfolio asset allocation.
Will gold shine further as 2019 matures? Lusk and Commerzbank say yes. Lusk says the technical chart picture for gold has improved as it moved off its September lows, and that futures-market speculators have room to buy.