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E.T.F. Investors Are Going for Gold, Despite Many Drawbacks
By: New York Times | October 11, 2019

Like eager prospectors in a B western, many investors believe there’s gold in them hills — and that’s where they’re heading.

Gold has often been a haven for investors, and there are plenty of reasons to seek safety now. They include the trade war with China, weakness in Europe, central bankers looking at subzero interest rates, turmoil in the Middle East, the looming Brexit and uncertainty heading into the 2020 United States elections, and fears of a possible recession.

By mid-September, investors had poured nearly $8 billion this year into exchange-traded funds that hold gold.

This growing gold rush has pushed the price of the precious metal up nearly 27 percent since October 2017, to more than $1,500 an ounce. The last time gold was as expensive was April 2013, after it had declined from its August 2011 recession high of $1,917.90. Last month, analysts at Citigroup predicted that gold could hit $2,000 an ounce.

“We now expect spot gold prices to trade stronger for longer, possibly breaching $2,000/oz. and posting new cyclical highs at some point in the next year or two,” according to the note, published Sept. 10.

Holding gold is “better than sitting in a negative-yielding bond,” said John Swolfs, chief executive of Inside E.T.F.s, an annual conference on exchange traded funds. “There definitely are more and more flows heading into gold E.T.F.s as the year goes on.”

While gold may be chemically inert, as an investment, it’s powerful enough to polarize financial experts. Asked if individual investors should move to gold E.T.F.s, advisers fall into three camps: absolutely not; absolutely; and, yes, but not too much.

Many mainstream investors avoid gold entirely, including Warren E. Buffett, who told a group of business school students in 2009, “It is a terrible investment over time — it just sits there and stares at you.”

In a February letter to investors of Berkshire Hathaway, Mr. Buffett calculated how gold would have performed if, as an 11-year-old boy in 1942, he had bought a few ounces of the metal instead of three shares of stock for $114.75.

A no-fee S&P 500 index fund purchased then would be worth $606,811 on Jan. 31, 2019, Mr. Buffett wrote. But with the gold, he said, “You would now have an asset worth about $4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business.”

But even some gold naysayers say this could be gold’s moment in the sun, including Vitaliy Katsenelson, chief executive and investment officer of the IMA investment advisory firm in Greenwood Village, Colo., and author of “The Little Book of Sideways Markets.”

“We never own gold here because we try to do everything to be rational,” Mr. Katsenelson says. “To be rational, I need to know the value of an asset. With stocks, I can come up with a good estimate for what a company is worth. The problem with gold is that it’s very difficult to figure out what it’s worth.”

Besides the small amount of gold used in jewelry and electronics, most of the metal is used to store value as a replacement for currency, Mr. Katsenelson says. Gold also doesn’t pay dividends, and the cost of securing physically held gold creates a negative cash flow, he adds. But now that $17 trillion in negative-yielding government debt is being held globally, gold has value because it isn’t linked to the health of the economy, he said.

“When every country is trying to destroy its currency, it makes gold a more attractive investment,” Mr. Katsenelson says. “It’s O.K. to own a little gold. Today, it’s not an irrational decision.”

A more dire reason to hold gold comes from Peter Schiff, chief economist and global strategist of Euro Pacific Capital, which invests most of its assets in securities of European and Pacific Rim gold companies. Mr. Schiff also sells gold and silver to individual investors at SchiffGold.com.

Mr. Schiff says low interest rates since the last recession have created a global bubble destined to create an economic disaster. “We’re going to have to atone for the sins of cheap money,” he said. “People should be buying gold now — and the smart money already is.”

Ric Edelman, a talk radio host and founder of Edelman Financial Engines, dismisses gold as a hedging strategy against a down market and focuses on using the metal to diversify holdings.

“Buying gold because you believe it will rise should stock prices decline is a myth,” he said. “There’s no direct correlation between stock and gold prices.”

He adds that individuals rushing into gold in anticipation of a market decline also run the risk of trying the failed strategy of trying to time the market: “No one has ever demonstrated a successful ability to engage in market-timing. Those who buy gold are comparable to those who are buying lottery tickets: Just because someone won the lottery doesn’t mean they’re capable of predicting the next lottery results.”

Instead, Mr. Edelman emphasizes the value of holding gold — along with timber, real estate, natural resources and other assets beyond stocks and bonds.

“Our portfolios have a very small allocation of gold and precious metals as part of broad natural resources position — and we always do. It’s not that we do it now based on expectations of the future. We believe in owning the entire market all the time,” he says.

If you are going to go for gold, E.T.F.s offer two main choices: funds that hold physical gold and those that invest in the stocks of gold miners and related companies, said Linda Zhang, chief executive of Purview Investments, an E.T.F.-focused advisory.

“Gold-miner E.T.F.s are not the same as gold,” she said. “These are equities that are subject to stock market volatilities, so if the market corrects, these stocks will also be affected. For anyone who is concerned about recession, especially a market correction, physical gold might be a more pure protection.”

Other strategies include leveraged gold E.T.F.s and inverse funds. Inverse funds move in the opposite direction from gold prices, falling when the price rises. Leveraged funds multiply the gains — or losses — of gold by a factor of two to one or three to one.

About 20 E.T.F.s hold physical gold, including the granddaddy of funds, the SPDR Gold Trust, established in 2004 by State Street Global Advisors. With an inflow of $4.6 billion as of September, the fund has collected more than half of all gold E.T.F. inflows so far this year. The other big gainer this year has been Blackrock’s iShares Gold Trust, with inflows of $2.5 million.

Both E.T.F.s are getting competition from newer gold offerings with lower expense ratios, said Elisabeth Kashner, vice president and director of E.T.F. Research for FactSet Research Systems. While SPDR Gold carries an expense ratio of 0.4 percent and the iShares ratio is 0.25 percent, three newer funds trade at 0.17 to 0.18 percent, including the Aberdeen Standard Physical Swiss Gold Shares E.T.F.

“In E.T.F.s, the most important thing is to know what you hold and, with physically held gold E.T.F.s, you know what you hold,” Ms. Kashner says. “In the E.T.F. world, gold is the shining example of something where the holdings are completely comparable.”

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