Author: Owen Trimball

Gold ETF investing has come back into focus for many investors this year thanks to the soaring price of gold bullion in 2016. Gold is actually up about 20% so far this year which easily trounces broad markets in the time frame, while there has been quite a bit less volatility too.

This is in stark contrast to how the yellow metal had been performing for much of the past few years, as gold was mired in a serious bear market, pushing the commodity far lower than the S&P 500 over the trailing five-year time frame.

But with questions about future interest rate hikes and inflation hitting the market now, gold is definitely making a resurgence, putting gold ETFs into the spotlight once more. However, gold ETFs remain widely misunderstood by many investors out there and there are still several myths and misconceptions about investing in this space.

So for investors thinking about buying into this soaring market, it is important to know the following 10 facts about the gold ETF and gold mining ETF world in order to make sure you get the right type of exposure, and understand some of the most important details about investing in this market:

GLD Isn’t Everything in the Gold ETF Investing World

Most investors who think of gold ETFs go right to the big dog in the space, the SPDR Gold Trust. This ETF has over $35 billion in assets and a great daily trading volume, making it an easy pick for most.

However, there is another great option for investors out there that can get the job done, the iShares Gold Trust (IAU) . This product still has a robust volume and an impressive $8 billion in assets, but it is often overlooked despite its cheaper expense ratio, coming in at 25 basis points compared to GLD’s 40bps fee.

But in addition to the expense differential, there is another key factor to note. GLD trades as 1/10 of an ounce of gold while IAU uses a 1/100 scheme. This may not sound like a big deal, but it actually makes GLD have tighter spreads between its bid and ask which can be important for traders.

So, traders and very large investors should probably stick with GLD as their preferred vehicle, but long term investors and those buying in smaller quantities would probably be better served by buying IAU instead. The expense ratio difference will really add up over time, and especially if you aren’t doing a whole lot of trading.

Futures vs. physical

Most commodity ETFs simply offer investors exposure to futures contracts tracking the commodity. But because precious metals have a relatively high ‘value-to-size’ ratio and are easy to store, investors have the option of either buying physically-backed ETFs like GLD or IAU, or purchasing futures-based funds like DGL and UBG.

Futures-backed funds can be more expensive and they also may suffer from futures curve issues (such as contango), though this can also become an asset (backwardation) in certain market environments too. Over the past year though, DGL has underperformed GLD and to me it probably isn’t worth it given the physical exposure options and the lower holding costs. Better to get the real thing in this case, and especially since most commodities don’t offer up the option at all.

The only saving grace is the issue of taxes. DGL may have a lower short-term capital gains tax rate than gold ETFs that hold the commodity thanks to their structure as a ‘commodities pool’. However, this may result in a K-1 at tax time, so there are some potential headaches with that approach too. For me, it seems like physically-backed is so rare in the commodity world and it gets rid of so many problems, that you might as well go for it in the gold world.

Gold Mining ETF Holdings Secrets

There are also a few ways to invest in gold miners if you do not want the gold bullion products directly. Among the most popular is to convert 401k to gold IRA or even more so are GDX and GDXJ which are both from Van Eck. GDX zeroes in on the gold mining industry and holds companies across a range of market cap levels while GDXJ focuses on small cap securities.

While GDXJ is definitely more volatile, most investors may not know that there are actually some similarities between the two funds. The top holding in GDXJ finds its way into GDX, while all of GDXJ’s top five holdings are in GDX, granted at a much lower allocation level.

So if you are thinking of buying GDX and GDXJ for ‘complete’ gold mining exposure, think again, as you are bound to get some overlap.

Additionally, it is worth noting that silver companies actually make up a decent portion of both ETFs.

In fact, for GDXJ, two of the top five holdings have ‘silver’ in their name (AG and PAAS), while GDX has Silver Wheaton in its top ten holdings too. So both might not be as pure as you are thinking either, something to note if you are getting into the precious metal ETF space.

Another Way to Invest in Gold with ETFs

Two often overlooked ways to invest in gold include products that utilize hedging techniques. In essence, they invest in broad markets, but use gold as a sort-of hedge in order to mitigate risks.

A great example of this approach is GHS from REX. This ETF invests in both the S&P 500 and it takes a long position in gold futures contracts, making the ETF designed to outperform broad indexes when gold is soaring. This technique can also act as a bit of a hedge, since gold and broad markets generally have low correlation levels as well.

Gold Exploration ETF: The Final Frontier?

For investors who don’t like the idea of leverage but still want to roll the dice, then the gold exploration ETF market may be for you. This segment of the ETF world is arguably the most volatile thanks to the companies that it holds.

These companies don’t produce gold, but are on the lookout for gold fields and deposits around the globe which can be recovered at a profitable rate. They are sort of like what the E&P market is for oil, making them highly leveraged to the price of the underlying commodity.

As you might expect, these are top performers in bull markets, but can be sluggish if we enter a bear market scenario once again . However, they are perfect for risk takers who do not want to delve into the leverage market (more on that below).

Leveraged Gold Mining ETFs Are an Insane Long Term Investment

Investor interest in the triple leverage market has been rekindled thanks to some absurd performances for funds in this space. Year-to-date the triple leverage gold ETN UGLD is up over 60%, while mining triple leverage funds have been even crazier, with NUGT adding over 300% in the time frame and JNUG, tracking junior gold miners, soaring by over 425% so far this year.

However, even with these great performances, all have been horrendous when taken from a long term look. All three are lower by at least 40% over the past three years, with the mining funds posting losses nearing 90%.

So while it might be tempting to buy-and-hold these given how they have done in 2016, the longer term chart suggests extreme volatility and big losses, proving once again that leveraged funds should be short-term trading tools and nothing more.

Some Broad Precious Metal Funds Are Basically Gold ETFs

There are a couple of ETFs out there—DBP and GLTR in particular—which bill themselves as broad precious metal ETFs, but is that really the case? Not really if you look to their underlying holdings, as these both put the majority of their holdings in gold.

GLTR puts nearly 60% of its assets in gold, leaving under 30% for silver, and roughly 11% for the duo of platinum and palladium combined. Meanwhile, DBP is even worse, as this ETF puts over three-fourths of its assets in gold and has the rest in silver.

So, just because something says it is a ‘precious metals ETF’ it doesn’t mean that it isn’t a gold ETF with a slight bit of diversification on top of it.

GLD Holds More Gold than The ECB

The level of investor interest in physically-backed gold ETFs is staggering. GLD owns enough gold to put it into the top ten holders of gold in the world, ahead of countries like the UK or India, and even the European Central Bank too.

And if you add other gold ETFs to the mix, gold holdings easily surpass one thousand tonnes on the ETF front, making exchange-traded funds a force in the gold world.

Gold ETFs Probably Help Boost Prices

Given this massive supply of gold held by ETFs, it probably shouldn’t be too much of a surprise to note that gold ETFs probably help boost prices in the underlying metal . That is because, at least in Q1, according to the World Gold Council, the main change in gold demand was from gold ETFs.

As you can see in the chart above ETF demand year-over-year was over 300% higher and was the primary difference when compared to 2015 numbers. Jewelry and technology were both lower showing that the bulk of the increase in gold demand was from investing, and specifically from ETFs.

So for at least part of this year’s gains, gold investors can thank ETFs!

Don’t Buy Gold ETFs for the Apocalypse

Some investors complain that gold ETFs aren’t useful because you can’t take physical delivery in the main funds like GLD or IAU (unless you are a massive investor). They say that one of the main reasons for owning gold is protection against an economic calamity and the ability to use gold as a bartering mechanism.

Investors should just think of gold ETFs as trading tools that can offer up exposure to the bullion market in a very liquid way. Without gold ETFs, the buying and selling of gold by the average person would be a laborious task and would involve high premiums and markups too. But with gold ETFs you can easily trade gold back and forth in seconds with minimal costs, so just think of these as easy ways to trade gold, and not part of a doomsday protection plan.

Bottom Line

Gold ETF investing is a bit more complicated than you might think at first glance. But hopefully this list of key facts allowed you to get a better handle on the market, and find more information on the best gold ETF option for your needs in today’s investing world.

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Taking Control

Over the past few days, it’s quite evident that alot has changed on the global financial landscape. However, there have recently been a few developments in China, which further signal that everything we know is about to change.

Several weeks ago, I made the case that China had been taking certain measures to put pressure on DC to give them more hefty weighting in the IMF, particularly regarding SDR inclusion.  Now that it has been confirmed that SDR inclusion “will be put off for at least a year”, China has decided to take matters into its own hands…by burying two twin fangs into the US Dollar standard.

Treasury Sell-Off

The Yuan-devaluations, which I covered earlier, were a big deal(and continue to be), because of the spillover which is now developing in other currencies, and especially, the bond market.  So it should come as no surprise that Bloomberg has now confirmed what zerohedge broke last week:

China Sells U.S. Treasuries to Support Yuan

China has suddenly begun to sell tens of billions(estimated over $100 billion, in fact), of US treasuries in just the past 2 weeks!  The enormity of that headline above cannot be overstated, and what is occurring is an enormous shot across DC’s bow.  However, what China’s doing is very logical, and a complete follow-on to their Yuan interventions, because in order to weaken the Yuan, relative to the US Dollar, it stands to reason that the demand for US dollars will have to be kicked up a notch for awhile.  

Now that we know China is selling treasuries, to prop up US dollars in the short term, and weaken their currency, it largely explains the noticeable spike in the USD index over the past week or so.  This mass liquidation of treasuries is a game-changer, because everyone understands what happens when large parties start to dump the “cadillac of the world’s debt instruments”.  Other nations will now likely be more emboldened to follow the Chinese(and Russian) lead, and abandon US treasury instruments as well.

This bond dump(and the reasoning given for it) now may hold the answer to a question, that I’ve been trying to solve in my mind over the past few years:

How is China going to “unload” a reasonable portion of their treasury position, without it: A) roiling the market too badly, and B) being seen as a completely hostile move toward DC’s world regime?

I believe this emergency move by the Chinese is a shrewd way of answering this question. Think about it!

Instead of selling tens(or hundreds) of billions of dollars in US treasuries as an overtly political move of retaliation, China can now legitimately say that they simply needed to free up more dollars in order to sustain a weaker currency!  Both to:

1) Sustain their export market(‘protecting jobs and revenue’) and to

2) Help prop up and give support to their stock market…

Now, neither of those things will work, but it doesn’t have…it only has to help sustain the perception that this mass liquidation of UST’s is about “helping” out Chinese citizens and the Chinese job market, instead of attacking the West.

This was my first thought last Friday, when I heard about the confirmation of the bond sales, and other shield brothers(including one of our resident Dutch shield brothers), also suspected as much.

In this way, their reasoning has ensured that the common Chinese citizen will now see these Yuan devaluations as ‘in their best interests’, and perhaps even a means of trying to ‘bailout’ the common man…all while gently nudging them in the direction of gold.

I warn you though, brothers: if this is indeed China’s gameplan, then we may not have seen the last of these devaluations…there may be more to come in the weeks ahead.

And if that’s true, then it follows that we likely also haven’t seen the last of the US dollar’s strength.

If the Chinese decide to devalue another 10%, or even another 5% versus the Dollar, it would likely require the sale of up to another several hundred billion dollars in US treasuries over the coming months.  Such a sale would give a rather large boost to the USD index within a short period of time….which could also provide further short term weakness to paper gold and silver prices.

That last part is not a given, I’m just giving fair warning here, that it could happen.  With the wind at the shorting hedge funds’ backs(to say nothing of Citibank, as well), it means the bottom in precious metals may not have been reached yet.

However, I still intend on responding professionally to this unbelievably good stacking opportunity right now…because the growing lack of silver(and gold) in the retail sphere is getting so dire and systemic, that it could upend the rigging con at any time without warning(dollar spikes not withstanding).

As aggressive as this part of China’s dedollarization is though, shockingly, that isn’t even the biggest news of the week.  The next move they made was even more bold!

Gold Valuations

For China then made a stunning change in the accounting of their gold reserves, by deciding to mark their central bank-held gold reserves, to market.  What this means is that the tens of billions of dollars of gold they(officially) possess, will not be frozen for long periods of time, or subject to government “fixes”.  For instance, the “gold” at Fort Knox and elsewhere, is comically “valued”, or “fixed” by the Fed and the Treasury, at roughly $42 per oz, and has been since 1973!  Those kinds of fairy-land valuations, from the Micky Mouse world of make-believe, will have no part in China, or the new global financial system.

This map shown beneath, which has been posted by other shield brothers before, is a snapshot of the growing list of countries who’ve now marked their gold “to market” as well.  The countries in green are the ones, that we know of, who have decided to allow their gold reserves’ values, to be accurately reflected by the London Fix price, at any time.

And boy howdy, would you just look at all that green?  

Folks, something should jump out at you about this map immediately…

Notice anything?

Remember what I’ve written about several times, as the true threat to DC/London bankster hegemony?

Yes, that’s right: a united Eurasia….

Notice how utterly lit-up most all of Eurasia is now?  With the exceptions of East Europe, Mongolia, a few of the “Stans”, and southern Asia….the entire Eurasian bloc is now as green as a lush Irish pasture!

What does this mean?

It means that the Eurasian bloc is, most assuredly, pro-gold, and that they intend for gold to have a future as a top-tier, reserve asset on their books, and likely, within their trade as well.

It means Russia, China, India, and Europe will be setting the new rules for the new system, not the DC & London tag-team, and that this new system will be based on a better international anchor, to determine real value for everyone.

It means that the sun is setting on the olden days of the “PhD standard” of unfairly valuing everyone’s currency, based solely upon a “world reserve”, debt-based, fiat currency.

For decades, an international system of using gold for sovereign or individual payments was really impossible, so long as gold’s price remained so highly manipulated and depressed.  France quickly showed the world how ridiculous Bretton Woods was, by simply taking delivery of gold at roughly $35 an ounce…which promptly ended that system.

The only way that gold(and silver) can be used, en masse, again, to settle trade between nations or individuals, is by treating them as special, top tier assets…and then by allowing those assets to freely float against the currencies of the world.

As we all know, gold and silver are the least fairly-valued, most heavily rigged assets on the planet. They must be revalued(by many multiples) higher than they are now, and then be allowed to find their true, stable value, relative to the real assets and currencies of the world.

The only way that can happen though, is for:

1) Most of the major powers to decide to embrace a freely-traded gold and silver price…and then..

2) Do what is necessary to free the gold/silver rigging power from the Western riggers…

China’s valuing their gold to market means that step 1 in that process above is virtually complete. Most of the nations East have decided that gold is their future for stability, wealth preservation, and trade.  The decision has now been made: US Dollars, as an international “anchor” are out…and gold is in.

Now they’ve but to set these metals’ prices free, and allow them to find their real values…and doing this means removing gold & silver from the vaults and coffers of those doing the rigging…This second step will be completed, and soon…

Conclusion

For years, the US dollar has been a blight upon humanity…a poison within the nations of the world…slowing their economic heart-rates, and shutting down their sovereignty.

Beijing, with this two-pronged strategy, has just buried its own twin fangs into the US dollar standard, injecting a counter-toxin into the Uber toxin.  Fortunately, the withdrawal from the US dollar poison will not kill the victims of it, because Eurasia is now also flush with dollar-toxin antidotes: mounds of gold!

China has now revealed more of what their endgame strategy will be.  They’ve begun a pincer movement aimed at buying their economy time in a spiraling world financial system.

From dumping treasuries(which also allows Beijing and Chinese citizens to scoop up even cheaper gold, by the way), to marking their gold reserves “to market”, China is sending a clear warning of its intentions.  The world doesn’t need governments fixing the price of gold or silver any longer, that’s what made this entire mess possible.  What we need, more than anything is truth. Truth is the one thing which can restore balance, confidence, and justice to a toxic, world financial system gone horribly wrong.

Paradoxically, the problem is, that since the current system was built by lying criminals, on the bedrock foundation of fraud…..truth is also the one thing that will destroy that system.  Thusly, Truth has been avoided at all costs, and for far too long.  It doesn’t matter though.  In the end, what is whispered in the darkness, will be shouted upon the rooftops.  Truth will win out in the end…and nothing can stop it.

This move by China to “fairly” value gold on their balance sheet, is a giant step toward truth, and brings gold’s international status of “Top Tier asset” that much closer to reality.  Now that China, Russia, Europe, and much of the rest of Asia and South America has marked gold to market…the world’s prior, dollar system has less time than ever.

China, Russia, and much of the international community is signaling that they’re prepared & strapped in…They’re in the cockpit, and have punched their “hyper-drive”. Dedollarization will now quicken to warp speed.

Eurasia is ready for this rocket ride to begin…and to benefit, on their balance sheets, from the gold(and silver) revaluations shortly to take place.

The question is: are you?

Source:  The Wealth Watchman