ETF Edge - 20 years of the revolutionary GLD Gold ETF 11/18/24

Episode Date: November 18, 2024

It’s been 20 years since the first gold ETF, the GLD, revolutionized commodity investing. It return on investment since then has been nothing short of “brilliant” but what could the next 20 years hold?      Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQ, proud provider of access to innovation for the last 25 years. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange, traded funds, you are in the right place. Every week we're bringing you interviews, market analysis, breaking down what it all means for investors.

I am your host, Bob Bizani. 20 years ago, the first gold ETF revolutionized commodity investing. What a trip it has been. So what are the next 20 years going to hold? Here is my conversation with George Milling Stanley. He was with the World Gold Council when it launched the GLD in 2004. He is now chief gold strategist with State Street Global Advisers, which runs the GLD.

Plus, Todd Sone at a BTF, of course, Catecas. George, you saw the clip I just read. You might recall you were supposed to meet me at the New York Stock Exchange. I need a little about this all the time. But you were supposed to be with me, right standing next to me. You backed out because there was fears that the SEC would somehow ding for violating securities law for promoting the GLD. We've come a long way since that. Things have changed. I think we're all above ground now, right? No question. You know what's amazing?

That gold bar I held up. That was 25 pounds. At that time was $180,000. What's what's that gold bar worth today? That's now worth more than a million. A million dollars. Absolutely. How things have changed. That's quite remarkable. It's amazing how heavy 400 ounces is too, Bob. I noticed the struggle with you were holding that up. Yeah, there's a lot. I think the most important thing. It was not just that suddenly you could buy gold, but suddenly it was, you could, commodity ETFs were viable. Of course, there was questions about how do you, where they store the stuff behind it, but this paved away for a lot of things after that. I mean, dramatically, so we had oil ETFs after that. We had other kinds of currency ETFs come after that. How has the gold

ETF changed the investor base for gold? Compare 2004. Who owned gold then? Compared today. Yeah, investment demand in 2004 was about 10% of total end years of demand. Jewelry was the lion's share, was 80% or even more at that time. Now, jewelry's down to about 50% of the total. Investment's gone from around 10% to 25, 30, sometimes even as much as 40%. That's always the big variable in the gold demand side. That's been a huge, huge change. And when you say investor demand, you're talking about demand for gold bars,

as well as ETFs. One thing that's changed, too, is central banks. Central banks were not really a big factor, and now they are. They're about 15% here. Yes. Why are central banks buying? What's their means?

It's mostly emerging market central banks, and most of them, on average, they still have more than two-thirds of their official reserves in dollar-denominated debt instruments, which is a dangerous overexposure to one currency. And on average, they have less than 5% of their reserves in gold, which is a lot less than most of their reserves. populations would put into gold. It's a diversifier. Even central banks want to diversify,

that seems to be what you're saying. Absolutely, absolutely. They don't want to be all in, you don't put all your eggs in one basket, right? You don't put all of your reserves into one currency. Yeah. And just on the, the jewelry side, lion's share of the demand is consumers in India and China. They consume gold as a, they consider it part of their household worth, Net worth, right? Correct. How is gold demand in China and India right now amongst consumers? Okay. China was going like an express train in the early part of this year, slowed down a little bit in the summer. That's often a seasonality that we notice, but it seems to be picking up again now that the government has put money behind the talk about stimulating the economy. And if that spreads into prosperity throughout the country, that will be good for gold jewelry.

India in the budget earlier this year they cut tariffs, import tariffs on gold. They also cut capital gains tax on gold. So that, again, is going like an express train. And we still have some months of the marriage season to go. So that's doing very, very well right now. So you can see these tailwinds we've got up here. I mean, you can see this is why gold's at a new high. You can understand why we're at a new high here.

And the investor base is strong. The central bank purchases are strong. the consumer in China and India are still buying. I want to talk about Bitcoin a minute, but how is the supply side? Is gold production increasing or decreasing? Is that fairly constant? Gold mine production tends to go up 1% a year or down. One percent a year. It really doesn't vary that much. You might hear at the end of this year that the gold mine production has reached an all-time record high, but it'll only be 1 or 2% higher than it was last year, so it doesn't really make a big difference. The big variable, I say, is investment.

the demand side. So gold's hit a rough patch recently. I mean, we had new highs going into the election and it slipped about 15% since the election. Can you explain what's going on there? Yeah, I think investors have gone gung-ho on risk-on assets. This is why we've seen the stock market go up dramatically, why we've seen the cryptocurrencies go up dramatically. I think this is all representative of a risk-on attitude. And of course, gold, as you know, is the ultra-risk-off asset. But gold's starting to claw back. It was back above 2,600 earlier this morning. I think it's starting to claw back some of the lost ground. I think things are looking good for the rest of this year and for next year too. Yeah. Todd, the GLD was one of the great

successes. At that time, 2004, it was still a fairly young history of exchange traded funds. It was the start of a wave of non-equity ETFs. We had the first crude oil ETF, USO, that That was in 2006. That began trading. Then we had currency ETFs come after that in 2005, what was around. And then we had leverage and inverse products in 2006. And then we're Bitcoin recently.

Tell us your thoughts about the success of these commodity ETFs since then. Well, I think it's somewhat funny that George, you mentioned George wasn't there with you when you introduced the gold bar. And you think about 2004, This was before Facebook, X, Twitter. Social media was not there.

Now you can just go out on social media and basically promote whatever you want. So it's just funny how times have changed. But ETFs are all about access, right? No matter what your endgame is, gold allowed you to add something to your portfolio besides an equity and a fixed income instrument. So you can get diversification, as George mentioned. I think it is interesting that gold GLD, since inception, has outperformed the Russell 2000 Small Cap Index for what that's worth.

So you talk about diversification. You could have just been in large caps, some fixed income in GLD, you've been great. So I think it's wonderful. The flows have been interesting recently. You've picked up. I think retail finally started to take notice that gold was acting much stronger than perhaps perceived. But technically speaking, yeah, you're a little bit extended. Now you're mean reverting here to perhaps reset.

Now, you follow ETF flows. You're sort of the master of this, which is why we have Mon all the time. GLD had huge inflows after July, but October, November started seeing outflows in the last few weeks in particular. I don't know if one a technical analysis, but can this respond to these sort of oversold conditions? Is there a prolonged corrective environment ahead of us? I don't know, what do you? Here's the tricky part, right? Gold was trading very extended from a 200-day moving average, right?

You're just a simple measure of trend. And historically, you do get corrections from there. Now the question is, and I would leave more on George's fundamental knowledge of what's going on here, is do you respond to the overall condition and continue higher, or do you answer a more prolonged, correct environment like you did back in, say, 2009-ish or so. There are two other variables here, though. What does the dollar do? And what do real rates do? If those continue to push higher, that's not going to be a great backdrop for gold. If you can get the dollar in real rates to cool off here, that's going to be great for the metal coming into next year. Yeah. George, we talked earlier, the gold ETF helped expand the investor base for gold. But the same thing is happening here with Bitcoin. There's been huge inflows into Bitcoin this year. And I'm just wondering, is Bitcoin any kind of competition for gold? How do you view that?

I don't believe it. I mean, you know, some people have tried to find some kind of inverse correlation between flows into Bitcoin, flows out of gold. We've not been able to find anything that's statistically persuasive on that. I think the point is that they basically do two different jobs. Gold is essentially a very protective asset. It'll protect against potential weakness in equities, protect against inflation, weakness in currencies, all kinds of different things like that. Bitcoin, pure and simple, it's a return play. And I think that people have been jumping onto the return plays.

That's what I mean by a risk on mode, which is where investors are right now. I find it curious that people call Bitcoin digital gold because I don't get the correlation, frankly. I mean, gold has been money historically. It is a store of value that is very questionable whether Bitcoin is actually a store of value. It does have real use cases. It has industrial use cases. It has jewelry use cases. Not the case for Bitcoin.

I kind of don't get that analogy with digital gold. I get it as people trying to promote a potentially new asset class, but it doesn't have the characteristics that gold has. absolutely doesn't. I think that the promoters of Bitcoin, I mean, this is why they called it mining. There's no mining involved. This is a computer operation, pure and simple. But they called it mining because they wanted to seem like gold. Maybe take some of the aura away from gold. I think that was what they were trying to do, and this digital gold thing. Look, the returns have been stellar in the 15 years since Bitcoin was launched. I can't deny that. Not a problem. But it is all about returns. Whereas gold, I think, Todd mentioned the diversification

benefits, as I say, and the protections that gold offers to, those are really, really crucial for investors. Bitcoin versus gold, as they need to have flow guy? To me, crypto is definitely risk on, right? It's a much newer asset class relative to the history of gold. I think the interesting thing that will happen is now with the new administration, they seem to want to, the idea is to put a solid regulatory framework around crypto. What does that do to its return characteristics? Does it go from being a speculative asset to something more streamlined like gold would be or is it remain a bit of the wild west. So there's totally different use cases to me. Yeah. I want to talk about gold as a hedge against inflation. So there's this very

strong belief in gold as a hedge against inflation. But I've seen this debated over the years by strategists. Some note that gold did well during the 1970s, but very spotty as an inflation hedge since then. It didn't do a great job from 2020 to 2020 or early 2023 as an inflation hedge. What's your sense of this? Is gold a hedge? Does it work sometimes? Doesn't work? It's not a good predictor of inflation. A lot of people think it is. I don't believe it is. Gold's also not going to offer you much protection against sudden sharp moves in the rate of inflation. So when you see CPI at 9%, that's not the time to go rushing out to buy gold. Gold comes into its own when we have sustained high inflation. By sustained, I mean a minimum of

two years, and by high, I mean 5% or higher. Whenever we're, we've had that, then gold has done very well, offering your returns of about 15% a year. But in the most recent bout of inflation, we did not have sustained high inflation. Gold and inflation were going up together, but not because of any cause. I think gold was going up for different reasons. Any thoughts on that? Still? Yeah, I think it's all about the environment. I pay attention to, again, dollar real rates to me. That's important overlay for gold. Strong dollar, usually not great, weaker dollar. Gold's dollar denominator. It calls more to buy it.

And what are rates doing? And I think in terms of flows, for me, earlier in the year, gold flows were kind of agnostic despite the great performance. I think that was because stocks were up, bonds were offering good yield, they were starting to get back onto the field, and crypto was strong. So what are the alternatives doing instead of allocating to gold? I would note, as successful as the GLD is, it's not been immune to competitive pressures. It has spawned a huge wave of competitors.

Put up a couple of them here. The I shares Gold Trust IAU is out there. They charge a lower fee of 25 basis points. In 2018, you launched a lower price fund. The Spider Gold shares mini-shared GLDM, which charges 10 basis points. There's GLDM there. And that's seen significant inflows. There's also competitors.

And I think this is interesting seeking to take advantage. It's a little quirk in GLD. Investors can only redeem their shares for cash. this is true, all these gold ATFs. But in 2014, Van Eck did launch the Vanek Gold ETIF, OUNZ, you see is the symbol there. And that provides the option to redeem shares for physical gold, including gold coins and bars.

And it too has seen inflows. Is there a demand to physically actually suddenly convert into gold? I don't think so. Let me correct you. Investors can buy and sell GLD. Investors cannot redeem. Yeah, redeem.

It's only the authorized participants, the broker-dealers who make a market who can create or redeem the shares. So you can buy and sell GLD. What GLD offers is exposure to movements in the gold price. And as you say, $75 billion worth of investor tollers over 20 years, that means that that's something that investors definitely want it. We were the right product at the right time, and I think we still are. I think that's why we're more than twice as big as the nearest competitor as well. Right. So the difference between, I just want to get GLD and GLD.

They're essentially the same product, right? One is 40 basis points, the other is 10 basis. And GLDM is based on one 50th of an ounce of inception, whereas GLD is based on one tenth of an ounce of inception. So it's a lower share price and a lower expense ratio to appeal to the retail end of the market. And we've seen this with a lot of big ETFs, right? I mean, a spy has this too. You know a category in ETFs is popular when it starts swanning similar products, and then the fees race starts to the bottom, and you know,

you start getting all the different quarks that you mentioned. That's how you know there's a sustainable ETF asset class, either brewing, developing, maturing, whatever you want to call it. So do people, I'm trying to think the difference between the two. Do active traders trade the GLD because it's more liquid than GLDM?

Or does it? Active traders certainly do. And there's an awful lot of institutions are active traders. There's also an awful lot of strategic investors who say, I want to put 5% of my money into gold. But I need to rebalance that, because the values in the portfolio are

fluctuating constantly, so I need to rebalance that. The low transaction costs that GLD give you can outweigh the higher expense ratio that you pay for GLD. Also, GLD has an options market. The open interest in options on GLD and 99.5% of all of the open interest on all gold-backed ETFs. We have an options market in GLD, nobody else does. And options can be helpful.

There's no one need to tip that it's an options market, just GLD. Is that right? Yeah. It's the only one with a real options market. And it can be nice to leg into a position or to write covered calls. For a small investor, I mean, 30 basis points, the difference in GLD and GLDM, that's not nothing. I mean, normally we're talking about four or five basis points, and I'd say, eh. But that's almost a third of a percent.

That's actually not insignificant. No, but my broker has done the math over the 20 years that we've had GLD, and because I have a position that, a strategic allocation that I need to rebalance, and because I like to use the equity market, I use the options market, And because I like to have a trading position as well, a tactical position, GLD makes financial sense for me in spite of that disparity in the expense ratio. With the understanding that you're a gold guy, when people ask you what percentage, gold is an asset class, it has proven to be so.

I think Bitcoin has not proven itself as an asset class. I don't know what you think, but when people ask you what percentage of, I'm an average retail investor. Okay. Okay, I'm 65 years old. What percentage of my portfolio should I have in gold? I'm asking a gold guy here, okay, with that understanding. You know, Bob, I've been looking for the average investor for 50 years. It's nice to meet you at rest.

I don't know how much you should have because I don't know what your tolerance for risk is. I don't know what your needs for liquidity are. There's a whole bunch of different variables that your financial advisor should know about you. He's required to know his customer. He should know that about you. The literature says any portfolio can benefit from a long-term, strategic allocation between 2 and 10% and where you would fit on that spectrum. I don't know but your advisor should.

Yeah, that's eminently fair to me, coming from the gold guy, 2 to 10%. Yeah, I mean, you mentioned crypto before. The big difference is gold has been through however many economic cycles, however many Fed policy cycles, crypto's only been through quantitative easing, and one fed hiking cycle. So, yes, it's on its way to becoming some form of an asset class, but it needs to see far more economic cycles, I think, to get to the travel. record that gold has. I love to be representing an asset class that has a 6,000-year track record.

I think I can draw some statistically significant conclusions from that. Did the World Gold Council buy the first gold coin, the Lydian gold coin from like 500 BC and Lydia like, you know, 20 years ago. They bought the rare one. I believe they did. I believe they did. I remember doing this. We did a story, George and I have a little time to go on this. It was a you don't see that. I think there's only a few in existence in the world. Oh yeah. Yeah.

Lydia was a source of course. I'd love to get my hands on one, but I don't think I can afford it. I know. I have no idea what it would be. So we have finished the first 20 years with gold at a new high. Give me an intermediate term outlook for the next couple of years for gold. What's a base case, a bull case, a bear case? You know, when we launched, when we launched YLG, gold was $450 an ounce.

It's now 2,500. It's now $5,000. five times what that price was then. If you look at a five times price, then gold should be somewhere over $100,000 in 20 years time. If we go up at the same rate, I have no idea what's going to happen over the next 20 years, except it's going to be a fun ride, and I think that gold's going to do well. And I bet you'll be there, just like you were 20 years ago. Your thoughts here, it will be replaced by other kinds of assets, digital assets, or is the fact that it's a physical

object and people like physical. I collect old 60s rock posters. There are people who like holding actually a physical copy of Jimmy Hendricks at the Fillmore poster. And for the same reason they like collecting collectibles, coins and stamps and physical objects. Do you think that gold will continue to have that kind of? Yeah, I think there's always going to be investors out there who know what gold is and does and what's it for in a portfolio. And I think from the ETF spectrum, you'll start to see more and more different types of products out there, right? We just have gold mixed with Bitcoin in terms of a stacking product. So the core of gold products, I think, are taken care of with GLD and IAU, etc.

But you'll start to see different spins on it, especially if the returns are still strong. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is the Markets 102 portion of the podcast, Todd Zone, head of ETF's, and for Strathegis, continues with us now. Todd, thanks for sticking around. We had a lovely conversation on gold with George Mill and Stanley, but I want to ask you about ETF flows going into the end of the year. Boy, this post-election flows, they've been staggering. 36 billion into equity ETFs, the three trading days after the election. That's one of the highest tallies on record. What's going on here? The flows are heating up. Are they going to continue into the end of the year? The market seems to

come off a little bit last week. Yeah, I think the election was a big clearing event, just certainty, right, rather than uncertain, even though that's always present. Over the last 65 trading days, we've seen almost 240 billion into equity ETFs. So I would say that the chase is on. You could make the case that spirits in a way

are stirring, right, animal spirits. So I'm a little worried, as much as the ETF industry is booming, that sentiment is getting a little bit too hot here into the end of the year. It's tough to fight the market in the fourth quarter. You know, this is seasonally, it's always strong. But whenever investors start to get too aggressive on one side, then it sets you up for a little bit of a speed bump.

So I see strong equity flows. I see really elevated volumes into leveraged ETF specifically. Single stock funds it out there. And so I would just press a little bit of caution heading into the first quarter of 2025. This money into single stock ETFs, but these are leveraged. Right. InVIDIA, two times longer. Tesla, Coinbase.

Right. And these are day traders, right? that are putting money into these. These are not long-term investments. No, these are not mom and pop. These are going to be retail traders who are really pressing their bets because you had some momentum coming to the,

specifically the crypto space post-election. But you always want to be on guard that when people get too optimistic, it can set you up for a little bit of disappointment. What about sector flows? I mean, despite the high prices for technology, I still see money going into tech sector. Cycicals seem to be strong.

What else? So, I mean, flows have been all in and on tech for much of this year, and I think that is starting to manifest itself in slightly weaker performance. We see the semiconductors outside of, say, NVIDium Broadcom, softening a bit. Software has come back, which is okay, but broadly speaking, tech is much more splintered today. Now I'm curious, financial saw some big inflows post-election, industrials too. Does that continue, and that was sort of the playbook past 2016 and 2020 elections?

Does that continue and eventually become more of a half? But for now, I'm okay with that. I still think the sickleclare is okay. At the same time, nothing for defensive stocks. Healthcare is no flows. Consumer staples, no flows. Is the problem, regulatory overhang for healthcare? Yeah.

Too much competition. I mean, Merck and Pfizer and even Lilly, which was great. The first half of the year just looked terrible. There is an unwind occurring for GLP1 related names, which was Lilly and Novo Nordisk and a few other other peers. Those were the names that were working healthcare. Now they are not working. Healthcare is down to about 10% of the S&P 500.

That's a 24-year low. Farma and biotech is at its lowest in the history of the S&P 500, I believe, because of what's happened to Merck and Pfizer recently. And so a lot of outflows from healthcare, which could be contrarian if you're looking for somewhere like that, but for now, that is a landmine,

especially with what's going on with the new administration. I think the market's really spooked by that. Yeah. The winner, you know, when I look at the flow, seems to be Kathy Wood. And the Arc. Kathy runs the Arc Fund, of course. And I think you said this is almost,

Arc is almost a play on the Trump administration here. Her biggest holding is Tesla. And then she's got the crypto derivative. She's got Coinbase and Robin Hood there. I mean, she had enormous inflows immediately. I mean, I think the traditional playbook was by a regional basis. Well, let me just say. She had, price went up.

I'm still waiting for big inflows. Yeah, do flows come back, right? So forget regional banks and small calves. ARC has basically built for Trump administration, like you said, crypto derivatives, Tesla, they own Bitcoin and some of their ETFs. And so the funds themselves performance has been great. Now, do flows come back? Do we get back to the environment from 2020 and 2021?

Interest rates are in a much different place. But I wonder if everyone can ignore that and say, this is the exposures that I want going forward. I don't know. You know, I mentioned flows. she's had basically outflows for a long time. Quite some time. So the question is, now that the prices have moved up,

will that attract more inflows? Will they start seeing that? Or is she going to get some of that back? So prices going up is good for her, but it'd be even better to see some actual inflows. If they don't receive inflows here, then I tend to wonder if a lot of folks have moved on and maybe they're just playing around in leverage products instead.

Leverage single stock funds take away ARCS thunder. That is a possible... talk about some of that in future episodes of ETF Edge. Todd, thank you very much for joining us and preach this. Todd Sone, of course, ETF strategist over at Stratigas. Thanks for listening, everybody. Join us again next week or remember, you can see all of our shows on ETFedge.c.com. How does InvescoQQQQR rethink possibility? By rethinking access to innovation and the NASDAQ 100. Let's rethink possibility, Invesco Distributors, Inc.