Overview and Evolution of Gold Exchange-Traded Funds (ETFs)

What is a Gold ETF?

A Gold ETF, or Gold Exchange-Traded Fund, is a type of commodity ETF based on gold. It's traded on stock markets and typically divides the fund into units representing fractions of an ounce of gold. There are two main types: Physical Gold ETFs, which hold actual gold assets like bars or coins, and Derivative Gold ETFs, which track gold contracts without owning physical gold.

 

Development History                           

                                     Gold Price Trend Chart Since 2010

• September 11, 2001 Terrorist Attacks
• 2007-2009: Subprime Mortgage Crisis and Housing Bubble, Global Economic Recession and Wall Street Collapse, European Debt Crisis
• 2014: Crude Oil Plunge
• 2015: Chinese Stock Market Crash, Gold Price $1172
• 2016: Brexit Referendum in the UK, Gold Price $1215

Since the end of 2005, the price of gold has experienced a historic significant increase, soaring from the previous level of $400-500 per ounce to a peak of $1921.18. Subsequently, it began to gradually decline and today stands at $2030.44, reaching a near five-year high.

 

Phase	plateau period	duration of plateau period	ascent period	price pivot (in US dollars per ounce)	range of increase during the ascent period.
First plateau	January 30, 1944 - February 27, 1970	313 months (26 years)	February 28, 1970 - January 21, 1980	50	400%
second plateau	January 22, 1980 - April 2, 2001	123 months（21years）	September 5, 2011	250	260%
third plateau	September 6, 2011 - December 31, 2015	51 months（4years）	January 1, 2016 - August 6, 2020	900	106%
fourth plateau	August 7, 2020 - now	Over 40 months (3 years +)	——	1850	——-

 

How is the investment outlook for Gold ETFs? What are the benefits of investing in Gold ETFs?

As the fluctuations of Gold ETFs mirror those of gold itself, most investors in Gold ETFs essentially believe that the price of gold will rise in the future.Gold performed remarkably well in 2023. While the price of gold hovered around $1800 per ounce at the end of 2022, it surged throughout 2023, hitting multiple record highs. In early December, the London spot gold price even briefly touched $2146.79, marking a historical peak.

Experts attribute this phase of rising gold prices mainly to market expectations of global central banks slowing down interest rate hikes, leading to a decline in US Treasury yields and a weakening US dollar. Simultaneously, global central banks' gold purchases have continued to increase to high levels.

 Therefore, bullish expectations for gold assets are expected to persist in the short term.

Based on the gold trend over the past year and the opinions of analysts, the investment outlook for gold appears optimistic.

Looking further ahead, continuously rising US Treasury yields, ongoing geopolitical tensions, and increased gold holdings by central banks worldwide have become the main factors driving gold prices higher. With the Fed shifting towards rate cuts, gold is likely to experience high volatility. Against the backdrop of global de-dollarization, gold holds significant investment value. 

Additionally, according to a report by the World Gold Council, central banks worldwide purchased approximately 800 tons of gold in the first three quarters of 2023, a 14% increase from the same period last year, and 24% of central banks plan to continue increasing their gold reserves in the next year.

From a medium-term perspective, concerns about sluggish US economic growth and persistently high inflation have led investors to hedge against a potential US economic recession by purchasing gold, which is expected to drive gold prices higher.

Although gold investment holds certain potential, investors should exercise caution. Price fluctuations in gold are normal, and investors should not be swayed by short-term price movements but focus on long-term investment value. 

Additionally, investors should devise a rational investment strategy based on their risk tolerance and investment objectives. 

For small-scale investors, Gold ETFs offer advantages such as convenience, flexibility, ease of storage, and high liquidity compared to physical gold, making them more attractive.

 

Is the volatility of investing in Gold ETFs high? What are the risks involved?

The price fluctuations of Gold ETFs are correlated with those of gold. Although gold prices may experience significant fluctuations due to certain events, they tend to be less volatile compared to other assets such as stocks.

According to data from the US financial analysis platform Morningstar Direct comparing the returns of various assets in different countries from 2001 to 2019, the average volatility of gold is 21.52%, with the maximum loss exceeding 37%; the average volatility of developed country stock markets is 19.66%, with the maximum drawdown reaching 53.60%; emerging market stock markets exhibit the highest volatility at an average of 23.08%, with the maximum decline being 59.79%.

Since gold prices typically do not move in sync with stock markets, they are considered a safe haven during market downturns. Therefore, incorporating gold products into asset allocation portfolios can often mitigate the overall risk of the portfolio.

In terms of market liquidity, Gold ETFs combine the liquidity of stocks with the intrinsic value of gold, allowing for buying and selling during regular trading hours, thus significantly increasing liquidity compared to trading physical gold.

Certainly, as an investment product, Gold ETFs also entail certain risks:

• Market Risk: While gold is often considered a safe-haven asset, the gold market itself is subject to risks. Factors like supply and demand dynamics, production costs, and geopolitical situations can significantly influence gold prices. Investors need to monitor market trends closely to adjust their investment strategies accordingly.
• Trust Risk: Gold ETFs typically operate under a trust structure, where the fund management company holds physical gold and issues ETF shares. However, issues such as operational errors, security concerns, or the bankruptcy of the management company could impact investors' holdings.
• Financial Derivative Risk: Some Gold ETFs may use financial derivatives like futures contracts or derivative trading to track gold prices. This may increase portfolio complexity and risk, potentially causing deviations in investment performance from actual gold price movemens.

 

How to Choose a Gold ETF?

1.Transaction Fees: Compare fees from different fund companies and choose one with lower costs, typically around 0.5%-1%.

2.Fund Size: Larger funds offer better liquidity and risk diversification. Opt for bigger Gold ETFs.

3.Tracking Error: Select Gold ETFs with smaller tracking errors for performance closer to the benchmark index.

4.Fund Manager: Assess the historical performance and investment strategy of the fund manager. Choose one with a strong track record.

5.Investment Objectives: Clarify whether your goal is long-term returns or short-term gains. Choose ETFs aligned with your investment horizon, such as physical gold ETFs for long-term and futures gold ETFs for short-term.

 

The investment path of uSMART

Brand Introduction

uSMART Securities (Singapore) Limited (uSMART SG) is an internationally leading securities firm. Established in Hong Kong, uSMART holds licenses from the Securities and Futures Commission of Hong Kong for Type 1, Type 4, and Type 9 activities (i.e., dealing in securities, advising on securities, and providing asset management services). In December 2021, uSMART obtained a Capital Markets Services License (CMS) from the Monetary Authority of Singapore (MAS). uSMART App, our flagship product, has received numerous awards and has a global user base of 500,000. As a technology-driven securities firm, we leverage the power of the internet to launch uSMART, a comprehensive investment platform with a customer-centric approach. Our aim is to seamlessly integrate technology and finance, providing customers with a secure, professional, intelligent, and efficient investment experience, enabling intelligent trading and effortless investing for investors. 

 

Investment Pathway

To access the uSMART SG app, tap on "Markets" at the bottom of the page. Then, at the top of the page, search for the keyword "gold." Next, tap on "Trade" in the top right corner, select the "Buy/Sell" function, and finally submit your order after choosing the stock price, quantity, and trading conditions. Alternatively, if you prefer the "Smart Order" function, simply select the smart order type.

 

Gold ETF Investment Strategy

1. Dollar-Cost Averaging Strategy

The dollar-cost averaging strategy involves investors regularly investing a fixed amount of money into a gold ETF at fixed intervals. This strategy helps investors diversify investment risks and achieve an average cost over the long term. Dollar-cost averaging is suitable for investors who have a long-term investment horizon in the gold market but prefer to avoid short-term price volatility risks. Utilizing uSMART's "Smart Dollar-Cost Averaging" feature, investors only need to choose the desired time period, and the system will automatically invest a fixed amount at regular intervals, potentially reducing the average purchase price per share through cost averaging.

2.Short-Term Trading Strategy

The short-term trading strategy involves investors buying and selling gold ETFs within a short period to profit from short-term price fluctuations. This strategy requires investors to have a strong understanding of short-term trends in the gold market and the ability to execute timely buy and sell transactions. Short-term trading strategies are typically suitable for investors with a high sensitivity to short-term movements in the gold market.

3. Diversification Strategy

"Don't put all your eggs in one basket." Investors can consider balancing risks and returns by diversifying their gold ETF investment portfolio, avoiding concentration of funds in the same type of fund. Possible investment portfolio types may include index ETFs, gold ETFs, bond funds, gold CFDs, bank deposits, and so on.

 

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Important Notice and Disclaimer:

We have based this article on our internal research and information available to the public from sources we believe to be reliable. While we have taken all reasonable care in preparing this article, we do not represent the information contained in this article is accurate or complete and we accept no responsibility for errors of fact or for any opinion expressed in this article. Opinions, projections and estimates reflect our assessments as of the article date and are subject to change. We have no obligation to notify you or anyone of any such change. You must make your own independent judgment with respect to any matter contained in this article. Neither we or our respective directors, officers or employees will be responsible for any losses or damages which any person may suffer or incur as a result of relying upon anything stated or omitted from this article.

This document should not be construed in any jurisdiction as constituting an offer, solicitation, recommendation, inducement, endorsement, opinion, or guarantee to purchase, sell, or trade any securities, financial products, or instruments or to engage in any investment or any transaction of any kind, nor is there any intention to solicit or invite the purchase or sale of any securities.

The value of these securities and the income from them may fall or rise. Your investment is subject to investment risk, including loss of income and capital invested. Past performance figures as well as any projection or forecast used in this article is not indicative of its future performance.

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