SPDR Gold Shares (GLD): Is this gold ETF a good investment?

The SPDR Gold Shares (GLD) ETF has retreated recently ahead of the upcoming US consumer inflation data. GLD was trading at $180 on Tuesday, about 6.45% below the highest level this year. Similarly, the gold price has dropped from an all-time high of $2,082.

US dollar index retreats

SPDR Gold Shares is an exchange-traded fund (ETF) that tracks the performance of gold. It has over $56 billion in assets and an expense ratio of 0.40%, making it the biggest in the industry.

Gold is seeing a confluence of factors that could push it much higher in the coming weeks. First, the US dollar index (DXY) has dropped sharply recently. As I wrote here, the index has dropped to $101.40, the lowest point since May. If the trend continues, there is a likelihood that it will move below $100 in the coming weeks. Gold has an inverse relationship with the US dollar.

Second, demand for gold remains at an elevated level around the world. Countries like Russia, India, Kazakhstan, and Turkey have all been buying gold in the past few years as distrust of the US dollar rises. 

Analysts believe that this trend will continue. For example, Russia recently confirmed that BRICs was planning a gold-backed currency to challenge the dollar. If this happens, we could see more demand for gold as the currency takes shape. 

Watch here: https://www.youtube.com/embed/J11Q-e1IZmc?feature=oembed

Third, the gold price is being impacted by supplies. The reality is that the productivity of gold mines has been falling. In most countries like South Africa, mining companies have to dig deeper to find the metal. As mines age, production is expected to drop over the years.

In the immediate near term, gold and the GLD ETF will react mildly to the latest US consumer inflation data. Economists expect the data to show that inflation dropped again in June. Still, analysts believe that the Fed will deliver another rate hike later this year.

Is GLD ETF a good investment?

Gold has been a good investment in the past few decades. It has moved from about $35 in the 1970s to almost $2,000 today. 

However, gold has generally underperformed the broader market over the years. For example, the GLD ETF has jumped by 42% in the past decade. In the same period, Invesco QQQ and SPDR S&P 500 Trust (SPY) jumped by 156% and 400%, respectively. 

The same is happening this year. GLD has risen by less than 5% while the other two have risen by 15% and 38%, respectively. This underperformance explains why GLD has seen outflows in the past two months.

Therefore, a bullish case for GLD and gold can be made. For one, gold has done better than the US dollar over the years. As such, you should only invest in gold and GLD for diversification, whereby it should only form a small part of your portfolio.

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