Physically-backed gold exchange traded funds are used by investors as an easy alternative to buy the metal within the equities markets. However, the innovation in ETFs can also add to the selling pressure on gold.
“The ETF revolution set expectations very high and brought a lot of liquidity at first” to the commodity markets, said Kevin Kerr, president and chief executive officer of Kerr Trading International. “After all, the ETFs were much more palatable to the average equity investor who wanted to steer clear of futures or physical gold and silver.”
Gold ETFs that hold the physical metal were credited for taking the commodity market to record highs over the past five years, reports Myra P.Saefong for MarketWatch. Gold prices recently dipped to the lowest levels seen in two weeks, at $1,421 per ounce, leading shares of the largest gold exchange traded fund SPDR Gold Trust (NYSEArca: GLD) down 2%. [Gold ETF Outflows Persist After Fed]
To date, gold futures are down 15%, with April witnessing an 8% drop. Large banks have lowered gold forecasts, which led to an outpouring of assets in gold ETFs, in addition to prior losses in gold ETF outflows earlier in the year. [Gold ETFs Contribute to Bullion Price Slide]
The outflows in gold ETFs have left some investors burned. The easy access that gold ETFs awarded the average retail investor was a huge advantage, however, the losses recently incurred are indicative of how much harm can be done when individual investors put capital into asset classes not intended for the masses or the inexperienced. [Gold ETF Asset Flows are a New Market Indicator]
“Investors are disenchanted with the commodity ETFs and the great promise they held when they were launched,” said Kerr. “Damage has been done by the ETFs as they have dissuaded many investors from the resource space due to losses.”
The iShares Gold Trust (NYSEArca: IAU), the second-largest gold backed ETF, has suffered a loss of $766.4 million in April alone, compared to GLD that lost $6.77 billion in the month of April.
SPDR Gold Trust
Tisha Guerrero contributed to this article.
Full disclosure: Tom Lydon’s clients own GLD.