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How to Trade the Gold Rush With ETFs

Gold price has been on a roller-coaster ride in recent weeks. While the debt-ceiling impasse, bets on Fed rate hike pause and recession fears are driving gold higher, a stronger dollar and rise in yields are weighing on the yellow metal.

Factors Driving Up Gold Price

Gold has become extremely popular this year as investors seek to shield their portfolios from persistent inflation and other economic issues like recession fears and banking turmoil. The debt default fears have further boosted demand for bullion as a safe-haven investment.

This is especially true as another round of deal talks between representatives of U.S. President Joe Biden and congressional Republicans to raise the government's $31.4 trillion borrowing limit ended with no progress. Republicans, led by Mr. McCarthy, are demanding more than $4 trillion in spending cuts in return for raising the ceiling. Democrats have refused and instead are offering to keep spending flat.

If the United States, nearing the Jun 1 deadline, defaults on its debt, it will run out of cash to pay its bills and could not borrow any more money. A default on its debt would likely mean a recession for the U.S. economy, thus raising the demand for gold. Notably, gold is often used as a means of preserving wealth during times of financial and political uncertainty. It usually does well when other asset classes struggle. It also acts as an inflation hedge (read: Here's Why Safe Asset ETFs Could Surge Again).

Additionally, moderating inflation has prompted bets that the Federal Reserve is nearing the end of its rate-hike cycle. Per CME FedWatch Tool, markets have priced in a 74% chance the Fed pauses rate hikes at its June policy meeting and a 40% chance the Fed could cut rates 25 basis points in November. The yellow metal is highly sensitive to rising U.S. interest rates, as these increase the opportunity cost of holding a non-yielding bullion. A pause or slowdown in the pace of rate hikes will lift gold prices higher.

Downside Risks

Gold is taking a hit from a strong dollar and the rise in yields. The U.S. dollar hit a fresh two-month high against the basket of other currencies on stronger data reports, which signals a resilient economy. Additionally, the U.S. dollar has long been viewed as a "safe haven" currency. This means that during periods of global uncertainty or market volatility, investors often flock to the U.S. dollar for safety.

On the other hand, short-term Treasury rose as investor jitters grew over a lack of progress in U.S. debt limit talks.

Given the abrupt changes in gold price and an uncertain outlook, investors should place their bet on gold ETFs cautiously or take advantage of the quick turn in sentiment with the help of leveraged or inverse ETFs.

Gold ETFs

These ETFs might be easier plays for investors seeking to deal directly in the futures market and are the most popular ones.

SPDR Gold Trust ETF (GLD): This is the largest and most popular ETF in the gold space, with AUM of $59.6 billion and an average daily volume of around 8.5 million shares. The fund tracks the price of gold bullion measured in U.S. dollars and has an expense ratio of 0.40%. SPDR Gold Trust ETF has a Zacks ETF Rank #3 (Hold) (read: Inflation Drops Below 5% Since 2022: ETFs Set to Gain).

iShares Gold Trust (IAU): It offers exposure to the day-to-day movement of the price of gold bullion. iShares Gold Trust has AUM of $28.8 billion and trades in a solid volume of 5 million shares a day on average. The ETF charges 25 bps in annual fees.  

SPDR Gold MiniShares Trust (GLDM): The fund seeks to reflect the performance of the price of gold bullion. It is a slightly modified alternative to the State Street behemoth gold fund SPDR Gold Trust ETF. Being a low-cost product with an expense ratio of just 0.10%, GLDM has amassed $6.4 billion in AUM and trades in a solid average daily volume of 1.4 million shares.

Leveraged Gold ETFs

Investors bullish on gold may consider a near-term long on the precious metal with the following ETFs.

ProShares Ultra Gold ETF (UGL): This fund seeks to deliver twice (2X or 200%) the return of the daily performance of the Bloomberg Gold Subindex. It charges 95 bps in fees a year and has amassed $200.2 million in its asset base. Volume is good at about 131,000 shares per day.

DB Gold Double Long ETN (DGP): This ETN seeks to take a two-times leveraged view on the performance of gold. It is based on a total return version of the Deutsche Bank Liquid Commodity Index Optimum Yield Gold, charging 75 bps in fees per year. DB Gold Double Long ETN has gathered $86.4 million in its asset base so far and trades in an average daily volume of 7,000 shares.

Inverse Gold ETFs

Investors who are bearish on gold may want to consider a near-term short with these ETFs:

ProShares UltraShort Gold ETF (GLL): This fund seeks to deliver twice (2X or 200%) the inverse return of the daily performance of the Bloomberg Gold Subindex, which reflects the performance of gold as measured by the price of COMEX gold futures contracts. ProShares UltraShort Gold ETF charges 95 bps in fees a year and has amassed $20.1 million in its asset base. Volume is light at a moderate 98,000 shares per day.

DB Gold Short ETN (DGZ): This ETN creates a short position in the Deutsche Bank Liquid Commodity Index Optimum Yield Gold, which is intended to track the short performance of a single unfunded gold futures contract. It has accumulated $3.1 million in its asset base and is the illiquid option, trading in a volume of 1,000 shares a day on average. DB Gold Short ETN charges 75 bps in fees per year (see: all the Inverse Commodity ETFs here).

DB Gold Double Short ETN (DZZ): This ETN provides investors with a cost-effective & convenient way to take a short or leveraged view on the performance of gold. It is based on a total return version of the Deutsche Bank Liquid Commodity Index Optimum Yield Gold. With AUM of $4.3 million, DB Gold Double Short ETN trades in an average volume of roughly 10,000 shares per day and charges 75 bps in fees per year from investors.

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SPDR Gold Shares (GLD): ETF Research Reports

iShares Gold Trust (IAU): ETF Research Reports

ProShares Ultra Gold (UGL): ETF Research Reports

DB Gold Double Long ETN (DGP): ETF Research Reports

DB Gold Double Short ETN (DZZ): ETF Research Reports

DB Gold Short ETN (DGZ): ETF Research Reports

ProShares UltraShort Gold (GLL): ETF Research Reports

SPDR Gold MiniShares Trust (GLDM): ETF Research Reports

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Zacks Investment Research