It may not be a repeat of the global financial crisis. Hopefully it won’t be, but recent stress in the global banking system is chasing many market participants to familiar safe haven assets.
That includes gold, and the aforementioned bank duress largely explains why the largest gold-backed exchange traded fund is higher by nearly 3% over the past week and up 7.51% over the past month. Of course, benefits are accruing to other gold ETFs, including the WisdomTree Efficient Gold Plus Equity Strategy Fund (GDE).
GDE, which is roughly a year old, is part of WisdomTree’s suite of capital efficient ETFs. The fund is actively managed and is unique relative to old guard rivals in the gold ETF category.
“For each dollar of exposure, 90% is exposed to large-cap equities, 10% is used as collateral and 90% is exposed to gold futures contracts—leading to each dollar representing $1.80 of notional exposure, a leveraged position. While leverage can create risk, it’s also notable that investors can achieve mixed exposure to gold and equities in a single allocation, possibly allowing them to keep other positions in the portfolio unchanged,” according to WisdomTree research.
In plain English, GDE provides investors an in to gold price action via futures contracts and exposure to shares of gold miners. The latter is a relevant point because, not surprisingly, gold miners are highly correlated to bullion’s price action. Consider the following: The widely observed NYSE Arca Gold Miners Index is up 4.19% over the past week and higher by almost 9% over the past month.
Of course, it’s possible that the current market environment, which is permeated by jitters and fears that more banks will collapse, could change on a dime and rapidly turn sanguine, inviting more risk appetite in the process. However, that may not be negative for gold and ETFs such as GDE.
“We, therefore, expect gold to hold on to recent gains in this time of turbulence,” added WisdomTree. “The key short-term risk for gold at this stage is not market confidence recovering quickly but a broader market meltdown that could drive gold selling to raise liquidity for meeting other obligations (such as margin calls). In that scenario, gold is likely to recover in time, as other investors will buy the metal to shore up their defensive hedges.”
Additionally, GDE’s futures/equities mix is all the more attractive at a time when more gold miners are prioritizing restrained spending and elevated capital returns to shareholders.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
