27 April 2024

The Fund that Reshaped the Gold Market

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The first U.S. exchange-traded fund to give investors a stake in gold was the fastest-growing financial product of its kind when it launched 10 years ago. Today, SPDR Gold Trust, better known by its ticker symbol GLD, is the fastest-shrinking. The fund’s trajectory mirrors the metal’s appeal as an investment. GLD’s holdings swelled in the wake of the financial crisis, reflecting the wave of investors seeking a haven who drove gold prices to record highs in 2011.

But GLD will mark its 10th anniversary on Tuesday in possession of about $27 billion in gold, down by $50 billion from its peak in August 2011. Gold prices are trading near four-year lows around $1,183 an ounce. Even so, many investors and analysts say the fund has transformed the precious metal from a sideshow for those who saw calamity and inflation around the corner into a mainstream investment.

The gold market was near a historic low point when SPDR Gold launched in 2004. Central banks were selling their holdings, with some questioning the precious metal’s role in the financial system four decades after most major economies stopped using gold to back their currencies. Arcane rules and high fees to trade and store physical gold kept many institutions and individual investors away from the market.

The World Gold Council, a group funded by mining companies, sought to revive gold demand by making it easier to buy and sell physical metal. They hit upon an ETF, still a relatively obscure investment product at that time. ETFs sell shares and use the proceeds to buy another asset, such as gold or stocks.

GLD launched on Nov. 18, 2004 under State Street Corp.’s now-defunct street TRACKS brand, later renamed SPDR. For the price of a share— about $44 at the time, $114 today—investors can own stakes of gold bars stored in HSBC PLC’s London vaults.

Previously, many investors had to buy gold coins—often at a steep markup—or set aside large amounts of cash to bet on prices in the futures market.

Buyers poured more than $1 billion into the fund in its first three days of trading, still a record start for an ETF. The fund’s popularity was supercharged by the 2008 financial crisis. Scores of investors sought shelter from a free fall in stocks or as a place to park cash and ride out the global economic downturn. After the crisis, unprecedented stimulus by the world’s central banks stoked inflation fears, further burnishing gold’s appeal.

Gold prices quadrupled in the fund’s first seven years. By December 2012, the fund held 1,353 metric tons of gold, trailing only the governments of the U.S., Germany, Italy and France. Today, the fund holds 720 metric tons of gold.

The prospect of rising interest rates in the U.S. and U.K., along with the global economy’s recovery from the 2008 crisis, have dulled gold’s allure. Today, the largest ETF, the SPDR S&P 500, has assets of about $198 billion, more than seven times those of GLD.

Some analysts say GLD has created a permanent source of demand for gold that wouldn’t exist otherwise, adding as much as $200 an ounce to the metal’s price. Investors now make up more than 30% of global gold demand, compared with 11% before GLD launched.

However, the days of investors pouring billions of dollars into the fund and sending prices to record highs may be over.

Click here to access the full article on The Wall Street Journal. 

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