Gold has become a go-to, safe-haven asset for investors to hedge against market volatility, but many are turning to physically-backed exchange traded funds to get their precious metals to fix as trading costs rise in the futures market.
The SPDR Gold Shares (NYSEArca: GLD) has been among this year’s most popular ETF plays, attracting $13.1 billion in net inflows, according to ETFdb data.
As the coronavirus pandemic fueled wide market oscillations, many traders have looked to gold to safeguard their wealth. However, many are utilizing ETFs over futures contracts to gain exposure to the yellow metal.
According to the World Gold Council and CME Group, total ETF holdings of physical gold bars have expanded 14% while net long positions betting on higher prices on the Comex exchange in New York declined 7% since late March, Reuters reports.
GLD, the largest and most actively traded ETF, has seen its gold holdings surge 24 since late March.
Gold futures and gold ETFs both help investors gain exposure to gold price changes. Gold futures contracts provide the buyers the right to receive the metal at a future day while physically-backed gold ETF shares represented physical gold bares stored in a vault. Short-term traders typically look to futures while long-term investors usually hold ETFs.
Since the coronavirus lockdowns, the sudden shift away from gold futures towards gold ETFs coincided with a period of diminished trading on the Comex exchange. The shutdown measures also affected gold supply routes and big gold-trading banks stepped away from the exchange.
Consequently, futures have traded significantly above London prices used by ETFs, and the cost spiked for rolling futures or exchanging futures near expiry for next month’s active contracts.
“If you were investing in Comex for the long term, things have got really bad for you,” John Reade, chief strategist at the World Gold Council, which owns the SPDR Gold Shares ETF, told Reuters. “You’re disincentivized as a Comex investor from holding those positions.”
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