I'm No Gold Bug, But....

I thought I would throw in my two cents about the new StreetTracks Gold ETF (GLD) that started trading on Thursday. Right out of the chute I'll recommend you read this post on Seeking Alpha.

An ETF that is a pure gold play seems like it has been in the works for years. Like most investment vehicles there will be advantages and drawbacks. Before the ETF, you could access gold a few different ways; own equity shares of mining companies, trade XAU options, trade futures, and there is probably some other way that I am not thinking of. The biggest drawback to the futures and XAU options is expiration, they are potentially decaying assets. If you are a speculator and you are wrong by a day your investment can be wiped out. The biggest drawback to mining stocks is that they don't have to perfectly correlate to what the metal is doing, its usually close but not exact.

The Gold ETF has no expiration and no real tracking error, save for the management fee. What it does not offer, that a lot of the stocks do, is a dividend. Investors don't usually place a high priority on gold stocks' dividends but still GLD does not have one.

I always have exposure to a gold stock for my clients. Should something like 9/11 ever happen again gold would be likely to rise quickly. It is a good counter strategy to an equity portfolio, plus I don't mind the dividend.

GLD is likely to be very popular both as a hedge and to speculate. I think GLD, and the soon to be issued Barclays gold ETF, will compete for investment capital that currently is in gold equities. I allocate about 3% to my one gold stock. If I ever decide to buy a gold ETF I would also sell my current gold stock. I doubt the uniqueness of that type of trade. We may have seen that type of action Thursday. Volume of GLD was high and the gold stocks I watch were all down more than I would expect given the size of the metal's Thursday decline.

I tend to look at supply and demand for investments and GLD creates the potential for a lot more investment supply. More supply doesn't have to be bad but is usually not good.

The article I linked to from Seeking Alpha addresses the theory that the amount of gold that either has been bought or will be bought could lift the gold price temporarily. It is possible that some of the recent run up was from buying enough gold to start the ETF. Yes the dollar has sold off dramatically, which usually causes gold to rise, but some of gold's price rise could be attributable to ETF implementation too.