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Why Gold ETFs are Soaring This Year

July 22, 2020


Gold has surged about 20% this year and is at its highest levels in nine years, making it one of the best performing major asset classes of 2020. The surge is mainly due to investors’ search for safer assets amid rising uncertainty for the global economy due to the coronavirus crisis.Gold, like other major asset classes, had plunged in March as investors sold everything and piled into cash. However as central banks and governments across the world unleashed unprecedented fiscal and monetary stimulus, yields plunged. Rock bottom interest rates further boosted the appeal of gold as they reduce the opportunity cost of owning gold.Gold is also getting a boost from uncertainty regarding US presidential election and rising geopolitical conflicts around the world.Almost $40 billion flowed into gold-backed ETFs in the first half of the year globally, exceeding the previous annual record of $23 billion from 2016, according to the World Gold Council.


As the major central banks all over the world continue to increase money supply, and government debt levels continue to soar, inflation which has remained muted so far, may tick higher. And the Fed may not be able raise interest rates, in view of weak economic conditions. Expectations for higher inflation may also boost demand for the precious metal.I believe that gold should be a small part (5% to 7%) of any investment portfolio, mainly due to its low correlation with other asset classes.The SPDR Gold Trust (GLD - Free Report) is the largest and most liquid gold ETF. Each share of this ETF represents about 1/10th of an ounce of gold. It has an expense ratio of 0.40%. Last year, State Street launched a cheaper version of GLD—the SPDR Gold MiniShares Trust (GLDM - Free Report) —which has an expense ratio of just 0.18%.  Each share of GLDM represents 1/100th of an ounce of gold.