What About ‘Currency Hedging’ in Gold ETFs?
By Chris Dieterich
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Markets are feeling a bit of a hangover one day after a rowdy, post-Fed rally.
Stocks, bonds and gold are all lower. The SPDR Gold Shares (GLD) is down 0.2% on Thursday. It climbed 2% on Wednesday after Federal Reserve policymakers’ lukewarm assessment of U.S. economic growth prompted market watchers to rethink how soon the central bank might raise interest rates.
Michael Dudas, mining analyst at brokerage Sterne Agee, likes the fundamental outlook for gold in the months ahead, as well as the technical picture that shows up on the charts. Barron’s recently highlighted the prospects for gold demand in the Eastern hemisphere. The upshot is that wage growth might allow consumers India and China to buy more stuff, including gold.
But even if you believe that buyers will be snapping up physical gold, the elephant in the room for gold investors is the surging dollar. Gold prices tend to move in the opposite direction as the greenback. That’s because gold is priced in the greenback, which often makes it more expensive for overseas buyers.
Dudas says continued easing by central bankers across the globe will likely suppress interest rates and provide additional support the dollar, which recently hit 12-year highs versus the euro. That makes owning gold in other currencies more appealing, he says:
“Monetary policymakers have indicated more than enough concern regarding lingering, too low inflation. Deflation fears among global central bankers likely to keep pressure on real interest rates.
Accelerating monetary policies pushing negative real and nominal interest rates through global central bank balance sheet expansion driving higher non-dollar gold prices, supportive eastern physical demand, and technicals should allow [gold] prices to recover”Gold bugs who are already comfortable using exchange-traded funds might want take a look at the AdvisorShares Gartman Gold/Euro ETF (GEUR), a riff on the the increasingly popular trend in ETFs to add a “hedging” element to negate big currency moves. The AdvisorShares Gartman Gold/Euro ETF uses derivatives to effectively “short” the euro while at the same time keeping a “long” position in gold.
That’s been a winning strategy this year as the dollar has rallied. GEUR is up 11% in 2015, while GLD is down 1%. Over the past three months, GEUR is the top performer among 32 gold-themed ETFs tracked by ETF.com.
The ETF is still new (in launched early in 2014) and small, with nearly $15 million. Its assets have grown this year, however, from a paltry $2.5 million at the end of 2014. Daily turnover has also increased, and GUER has traded around 40,000 shares on an average day in 2015. Its small size and relative newness keeps it off the menu at some brokerages for now. Its prospectus outlines total fees, including a fee waiver, at 0.65%, higher than traditional gold ETFs.
Dennis Rhee, managing partner at New York City’s Treesdale Partners, manages the ETF’s portfolio. He tells Barron’s that this fund, as well as another that works with the yen, was created for investors that have “a bullish dollar stance but also want gold to diversify their portfolio.”
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