Inside the No.1 Gold ETF
The SPDR gold trust defends its fees, claiming that "Most investors can't Buy Gold"...
GOLD DELIVERED yet another great year in 2009, writes Lara Crigger at Hard Assets Investor, rising a further 25% against the US Dollar and extending its bull run to nine years straight.
The largest Gold ETF, the SPDR Gold Trust, had a big year too, taking in more than $13.8 billion and ending the year with $40.2 billion in Gold Bullion – held in trust to back the value of gold-tracking shares traded on the New York Stock Exchange – and putting it second only to the SPDR S&P 500 ETF.
Can such incredible growth continue? After such a banner year in 2009, where does the Gold Price – and the biggest trust-fund structure aiming to track it – go from here?
Here Jim Ross, senior managing director at State Street Global Advisors – the company behind GLD and other SPDR funds – speaks to Hard Assets Investor about gold's outlook for 2010, whether GLD moves the gold market, and what's behind the 0.40% expense ratio.
Interviewed at the recent Inside E.T.F.s Conference, Ross is also the president of SSgA Funds Management Inc., where he's involved in product development, marketing and product management for SSgA's investment strategies...
HardAssetsInvestor.com: So how do you see the fundamentals for gold shaping up for 2010...?
Jim Ross, senior managing director of SSgA: While I'm not the best to predict the price of gold, I think if you look at the underlying fundamentals driving gold, they're still there.
Gold Investment demand, concerns about the US Dollar, concerns about inflation and even concerns, to a certain extent, about the world – all those things have historically driven the price of gold. And they've driven it higher, too. I think the case has been made that gold is a non-correlated asset, and it needs to be a part of your portfolio for the long term. But I think what we've seen last year, and what we'll continue to see go up and down is the tactical overweight to gold, because of some of those fundamentals.
HAI: Do you think the economic recovery is strong enough now that we're going to start seeing a recovery in the Dollar, and perhaps a slowdown or even a turnaround in gold as a result?
Jim Ross: Well, remember, that that's just one driver of the Gold Price. All the other things tied into supply and demand will push the price of gold. I look at gold more along the lines of, does it belong in your portfolio? Is it helping people diversify their overall portfolio? You look at 2008, when equities, broadly speaking, were down 40% in that last quarter. And gold was up. It just shows that its non-correlating factors work.
There's going to be times when the US equity markets go flying up, and gold's going to go down, because that negative correlation will still hold then too. But it's always driven by different factors. That's the key from a portfolio standpoint.
HAI: Gold Mining production has slowed down in recent months. How will that affect the picture?
Jim Ross: That's a key point. Gold production's not increasing right now. That leads me to believe that price could stay up there. It's at a high price now, and we could see it go higher at the end of the year, but it's going to be a bumpy ride.
HAI: So why purchase a Gold ETF, versus buying coins or the bullion itself?
Jim Ross: Most investors can't buy the bullion themselves, because it's too expensive. Most people can't access physical Gold Bullion, and they can't access Gold Futures contracts. What GLD really did when we brought it to market is that it gave people low-cost, efficient access to the Gold Price. That just didn't exist five years ago. It "democratized" the ability to invest in gold, which you know is kind of the basis of ETFs as a whole. It helped solve investment advisers' concerns about how to access gold in a simple way.
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HAI: Structurally speaking, [a financial trust] really doesn't get simpler than a physically backed exchange-traded fund, either. You're just sticking gold in a vault.
Jim Ross: Right. And GLD usually gets lumped in with the other ETFs. Somebody just came up and asked me, "Wait, so is GLD like UNG?" [the natural gas-tracking fund, which uses derivatives to follow the price of gas]. And really, it couldn't be further from UNG. That doesn't mean that UNG is a bad product. But UNG has different aspects to it, regarding Rollover, Contango vs. Backwardation, and other things impacting its price. I like GLD because it's simple, and I can explain it in a five-minute conversation.
HAI: But is an expense ratio of 40 basis points too high for a physically backed fund?
Jim Ross: The average ETF is 65 basis points. If you look at GLD, it's the second-largest ETF in the world. Of the top five ETFs, there are two very large US equity ones, both at 9 basis points [the SPY and the iShares S&P 500 ETF]; the emerging markets one [iShares MSCI Emerging Markets ETF] is 72 basis points; and [iShares MSCI EAFE ETF] is at 35. So GLD is right in the middle.
It comes back to the cost of actually custodying gold, versus just transferring securities – custodying gold is actually very expensive. You need a big vault, you've got to pay the guards, and so on. That is a very expensive piece of the product. Because it's a grantor trust, that's what makes it expensive to run.
Plus there's a significant amount of regulatory focus on it, which I think is good for the product. But we're doing quarterly 10-Qs and 10-Ks, versus traditional mutual fund reporting. So it's very different.
HAI: There are all these conspiracy theories that GLD doesn't actually hold the gold you say you're holding. What do you say to that?
Jim Ross: The gold's there! I've seen it. I have pictures of myself in the vault. I don't know where some of those questions come from. When it came to market, GLD disintermediated some people's businesses. Most metals dealers were willing to adjust and adapt to GLD, but I think for some people with very expensive coin-type things, GLD was a disintermediary.
Like I said, the gold is there. It's audited twice a year by a reputable firm in the UK. It's a US-registered security, governed by the Securities and Exchange Commission, and these days they would be very aggressive if they didn't think it was there.
HAI: Some critics say that because it's so huge, GLD moves the gold market. Does it?
Jim Ross: GLD has grown significantly, but still, it's dwarfed by the vast amount of gold in the world. In total, GLD is still less than a year's production – not even close to a year's production – of gold. So I don't think it moves the market at all.
I think there are so many other factors that move the market – and remember, gold is one of the most liquid markets in the world. And it's a 24-hour-traded market. So from that perspective, I don't think GLD moves the market at all.
The market reacts to some of the things that drive people to invest into GLD. So if you see a trend where people want to invest in gold and GLD's moving up, then some will say GLD's moving the market. But it's really the other way around. It's just the underlying trend that people want to Buy Gold, and they're executing their transactions by buying GLD. That is going to grow the trust fund.
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