A Gold ETF Hits the Top

A bullion fund overtakes a popular stock market investment—briefly

Gold has reached a new milestone: The leading exchange-traded fund that tracks bullion surpassed its stock market counterpart as the biggest ETF. The SPDR Gold Trust saw its market value rise to $76.7 billion on Aug. 19, when the metal topped $1,881 an ounce for the first time. The SPDR S&P 500 ETF Trust, which tracks Standard & Poor’s 500-stock index and reigned as the industry’s largest exchange-traded fund since 1993, stood at $74.4 billion. At the start of the year, the stock ETF was 56 percent larger than the gold ETF. “Gold has become the portfolio antidote for the global financial crisis,” says James McDonald, chief investment strategist at Northern Trust.

The gold fund’s reign was brief: It fell back to second place on Aug. 23 as the price of gold began a steep slide, settling at $1,757 an ounce on Aug. 24. Yet the factors that have driven gold’s price higher remain in place. Investors turn to gold in times of financial and economic turmoil as an alternative store of wealth to stocks and the dollar, and a hedge against inflation. Gold has been bolstered by concerns that European countries will struggle to repay their debts and that the U.S. economy is weakening under the strain of 9 percent-plus unemployment, depressed home values, and a decline in consumer confidence. “We are seeing some lasting asset-allocation shifts to gold, including by central banks, as well as some safe-haven flows that could well be reversed in the months ahead,” Mohamed El-Erian, chief executive officer of Pacific Investment Management, said on Aug. 18.

The SPDR Gold Trust, created by trade group World Gold Council in November 2004, is the biggest ETF tracking the price of the precious metal. The fund is backed by gold bars deposited in a London vault. The creation of ETFs to invest in gold has given investors a way to speculate on gold prices without having to directly own or trade the precious metal. Research firm Morningstar tracks about two dozen gold mutual funds in the U.S., all of which invest in gold-mining stocks or indexes composed of companies engaged in exploring and mining the precious metal. The stocks and indexes don’t necessarily move in tandem with the price of the underlying metal.

Paulson & Co., the hedge fund run by billionaire John Paulson, was the largest holder in SPDR Gold Trust as of June 30, with 31.5 million shares, or 7.4 percent of outstanding stock, according to regulatory filings. The investment accounts for about a third of the firm’s $35 billion in assets, according to a person familiar with the fund who asked not to be named because the information is private.

Even after its recent drop, gold is up 25 percent in 2011 and is on its way to its 11th straight year of gains, while the S&P 500-stock index has lost 5.2 percent, including dividends. The gold ETF has more than doubled in price since the collapse of Lehman Brothers in September 2008 roiled financial markets, while the SPDR S&P 500 ETF has fallen 4.7 percent, including dividends.

Northern Trust’s McDonald cautions that gold is not an ideal refuge. It does not provide any income and is vulnerable if investors change their minds about the direction of the global economy. “Gold is not a substitute for cash or Treasury bonds,” he says. “Because of the lack of an earnings stream behind it, when sentiment shifts, gold can go in the other direction and will have more momentum behind it.”


    The bottom line: With gold surging this year, the main gold ETF topped the leading stock ETF in market value for the first time.

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