Gold stocks hold a valuable place in asset allocation for investors, especially in times of high inflation and economic uncertainty. Investing in gold can be tricky, but one of the best investments to gain exposure to gold is through the S&P Gold Shares ETF.
Over the past month, several gold mining stocks have soared as the stock market recovered and as a global recession looked more and more likely. GLD has also gained after hitting a 52-week low on Nov. 3.
In fact, according to MarketSmith, it is now trading above its 50-day moving average but below its 200-day moving averages. It is trying to form a base, although there is no buy point yet. GLD investors may want to wait to see whether the stock can form a base before adding more shares to their investment portfolio. Also, it would be bullish if GLD tops resistance around 167.
GLD is not the same as gold mining stocks, which can be volatile and are subject to the whims of the mining company and the stock market.
Gold has been rising on fears that we may be entering a recession and an extended period of high inflation. GLD soared above 190 in early March after Russia invaded Ukraine. Gold prices continued to maintain a reasonable level and appeared to be forming a flat base in mid-June and then working toward a cup base in late July-early August.
Will A Surge in Gold Mining Stocks Lift GLD?
Investors flocked to gold also as an escape from the stock market correction. But they were turned away by an aggressive Fed and expectations that if there's a recession it will likely be mild. The strength of the U.S. dollar also turned investors away from gold. Two things have happened since then: The U.S. dollar has weakened, and threats of a global recession have increased. Both could favor GLD.
"Precious metals typically thrive in environments rife with uncertainty, whether it's geopolitical or monetary," ETF provider Direxion wrote in a note to investors this week. "This year has seen no shortage of geopolitical turmoil, but the Federal Reserve has remained steady with their hawkish monetary policy. But as October's Consumer Price Index (CPI) numbers came in below expectations, the Fed may have initial grounds to slow the pace of rate hikes. This could become a bullish catalyst for precious metals stocks."
Still, GLD has outperformed the S&P 500 this year, returning a loss of 4.64% vs. a loss of 17% for the S&P through Tuesday. Many investors believe gold still has a place in long-term portfolios and indeed for the rest of 2022.
"We believe that investors may warm up to gold over the remainder of 2022 and into 2023," wrote Darrell Cronk, chief investment officer at Wells Fargo Investment Institute in his midyear investment commentary.
GLD Stock Is Great Way To Gain Gold Exposure
GLD stock aims to match the performance of the price of gold bullion, as quoted in London.
Gold provides a natural hedge against inflation and is regarded as a safe-haven investment during downturns in the economy. The price of gold tends to rise during times of inflation due to its dollar denomination, which offsets the decline in value of the dollar caused by inflation.
It can also be a buffer against a bear market, or in the case of an international crisis. The Russia-Ukraine war is one example. But as global investors recently flock to the U.S., that has pushed up the strength of the U.S. dollar, counteracting the price of gold.
A gold ETF like GLD is only one way to gain exposure to gold. Among the other methods are buying gold itself, through bullion, coin or jewelry, or by buying it as a commodity that can be traded on commodity exchanges. Another way is by investing in mining stocks like Barrick Gold, Franco-Nevada, Freeport-McMoRan or Rio Tinto. Two of those stocks, Franco-Nevada and Rio Tinto, are building cup bases.
Another alternative is to invest in other ETFs that invest in gold bullion. The iShares Gold Trust ETF, the $3.9-billion-in-assets SPDR Gold MiniShares Trust or the Aberdeen Standard Physical Gold Shares are good examples.
Other Gold ETFs Can Help
It's also possible to invest in any of the other ETFs that hold gold as one of many precious metals. Examples include U.S. Global Gold & Precious Metals and Aberdeen Precious Metals Basket. You can also hold an ETF that invests in gold mining stocks, such as the iShares MSCI Global Gold Miners or the Direxion Gold Miners Bull 2X.
But some of these gold alternatives have problems from an investor standpoint. For one, by holding gold bullion, coins or jewelry, investors have to worry about a place to store it, insuring it and the chance of it being robbed.
With trading gold as a commodity, there are several costs involved through the exchanges themselves or through brokers. By investing in mining stocks, investors have to keep in mind that you're investing in a corporation, which requires paying attention to fundamentals and technical analysis and knowing what other products the mining company is invested in.
A Hedge Against The Rest Of your Portfolio?
In terms of investing in other ETFs that invest in gold bullion, investors have to take liquidity into account. With thinly traded funds, it can be difficult to perform chart analysis. Only IAU, with $27 billion, comes even remotely close to the $56 billion in market capitalization that GLD stock has.
If your goal is to invest in gold as a hedge against the rest of your portfolio, or as a tactical investment, then GLD may be a wise choice.
During the first quarter of this year, GLD was the fifth-largest ETF overall in terms of net flows, raking in over $7 billion.
"In the long term, gold serves as a strong strategic component in many portfolios, not only for its diversification benefits but also for its returns," the World Gold Council wrote in a February report about the use of gold as a strategic inflation hedge. "Gold's ability to protect against more than increases in the general price level suggests that its long-term real returns should be positive — something current long-term portfolios may struggle to achieve."
If, however, your interest is to follow the technical signals of GLD's chart, there are indeed good times to buy and sell the S&P Gold Shares ETF.
GLD Stock Technical Analysis: No Base Yet
From a MarketSmith chart analysis standpoint, GLD is currently trying to form a base after hitting a 52-week low earlier this month. Its 2023 high was 193.30 on March 8. So far, there's no clear buy point.
GLD stock had already been rising and on Feb. 14 completed an earlier flat base with a buy point of 174.77. It ramped up to 193.30 during the Russian attack on Ukraine as investors sought havens.
"Gold is effective as an inflation hedge and to preserve wealth," Kurt Nelson of SummerHaven Index Management said in an April 11 podcast. "But if we are in a rising rate environment, there is an opportunity cost to holding gold. Gold does well in a risk-off environment, more so than as a tactical allocation tool."
Are Gold Stocks Volatile?
The S&P Gold Shares ETF is volatile. Its Relative Strength Rating has climbed one notch to 60 from 59 a month ago. As a commodity ETF, it has no earnings and also doesn't pay dividends.
GLD stock also has a high IBD Accumulation/Distribution Rating of B, which measures the relative degree of institutional buying and selling the stock has experienced over the last 13 weeks. GLD shares are just 3% owned by large investment funds, and 1% owned by banks, according to MarketSmith. USAA and MainStay Funds, a division of New York Life, are the largest fund owners.
S&P Gold Shares can also be used to buy call and put options, and to generate income. That can be achieved with covered call options or a synthetic long trade. Gold can be unattractive for income investors without a dividend payment. But using GLD options can enable investors to generate income.
And for the best stocks to buy or watch, check out IBD Stock Lists and other IBD content, such as how to find the best ETFs.
Follow Michael Molinski on Twitter @IMmolinski
