Eric Dutram: As we head into further into December, the impact of the Fiscal Cliff looms large over the U.S. economy. This budgetary nightmare has been in the limelight across all segments of the market whether it be currencies, commodities, or stocks.
Should the spending cuts and tax hikes come to pass, it may lead to a tightening period at a time in which the economy is still unsound. It is believed that both the tax increase and spending cuts can result in huge fiscal contraction for the U.S. economy leading to a negative GDP growth, and possibly a recession.
Impact on Gold
With the nearing fiscal cliff investors are getting apprehensive about its possible impact on the U.S. economy depending upon the decision of the Congress. In such a scenario, one commodity which is in the limelight is gold.
What would now be the possible impact of the fiscal cliff on gold? Well, some are of the opinion that the yellow metal will reach new highs while others think that it will follow the market like equities—thanks to a stronger dollar– and will fall.
A general trend in the gold market depicts that it tends to rise when the market turns south. If the fiscal cliff takes place then it will hamper the U.S. markets as it will ultimately result in the U.S. GDP going under pressure. So, the market panic may lead the metal to higher levels as investors shift their asset to safer havens like gold.
On the other hand, if the cliff does not happen, then ultimately the market will alter its attention on how Q3 degrades the dollar and its resulting impact on inflation which will lead to higher metal prices (Long Term Treasury ETFs: Ultimate QE3 Play?).
Some even are of the opinion if the cliff does not happen and the market does not fall, then investors may opt for more risky assets than the safety of gold leading to a fall in the metal price.
Depending on the scenario, investors may want to go short or long on the metal. A better way to access the metal is through ETFs.
The development of gold ETFs have made this even easier for investors, as these products are liquid and can often come with lower expense ratios when compared to what investors usually see in gold bullion investments. Below we have briefly described some of the gold ETFs out there for investors looking for ways to play the Cliff from a commodity perspective:
The two largest gold ETFs in the space are SPDR Gold Trust (NYSEARCA:GLD) and COMEX Gold Trust (NYSEARCA:IAU). Both of these are backed by physical gold and match the spot prices of gold. GLD tracks almost 100% the physical price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. Each share represents about 1/10th of an ounce of gold at current prices.
The fund appears to be rich in both asset base and volume. It manages an asset base of $74,560.7 million and trades with a volume level of more than 10 million shares a day. It charges a fee of 40 basis points, and it also has a very low bid ask spread.
IAU is backed by physical gold under the custody of JP Morgan Chase Bank in London. Each share represents about 1/100th of an ounce of bullion at current prices. This fund manages an asset base of $11,763.1 million a day and trades at a volume level of more than 7 million shares a day. IAU is a low-cost fund charging a fee of 25 basis points, much lower than what GLD charges (Who says iShares ETFs are not cheap?).
Other than physically backed gold, there are other ETFs also in the space which use tools like futures, options and swaps to track the performance of the metal. The top fund in the category is the DB Gold Fund (NYSEARCA:DGL) initiated in January 2007. The fund tracks the performance of the DBIQ Optimum Yield Gold Index.
The fund manages an asset base of $484 million and trades with a volume level of more than 200,000 shares a day. The fund charges an expense ratio of 79 basis points and it has been a good performer in the last one year, delivering a return of 7.69% (Three Best Gold ETFs).
Among equity based ETFs, there is the Gold Explorers ETF (NYSEARCA:GLDX). GLDX is one of the largest and actively traded funds in the space and looks to follow, before fees and expenses, the Solactive Global Gold Explorers index.
The stocks in the index comprise liquid international stocks involved in gold exploration and are considered to be the largest in the space. With total assets of $39.9 million, the product is nearly 60% concentrated in the top 10 companies. The fund mainly consists of small cap companies of Canada and holds 21 stocks in total.
The product charges investors 65 bps in fees per year. The performance of the fund has been negatively impacted by the slump in the overall market in the second half of the last year, thereby delivering negative 37% returns over the last one-year period, although it has come back a bit in recent months.
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