ETF Edge - Markets: Fresh Breadth & Owning Gold in the Digital Age 7/24/23

Episode Date: July 24, 2023

CNBC’s Bob Pisani spoke with George Milling-Stanley, Chief Gold Strategist at State Street Global Advisors – along with Todd Sohn, ETF and Technical Strategist at Strategas Research. Theydiscussed owning gold in the digital age. With so few decisive breakouts, investors have been waiting for the precious metal to regain its luster for years now. What’s holding it back? Plus, the market’s recent broadening out has been a blessing for the bulls. They tackled which sectors might best allow ETF investors to benefit from the fresh breadth. In the “Markets 102” portion, Bob continued the conversation with Todd Sohn from Strategas Research. 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, Supporting the Innovators Changing the World, 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, and breaking down what it all means for investors. I'm your host, Bob Pisani. Today on the show, we'll discuss owning gold in the digital age. With so few decisive breakouts, investors have been. been waiting for the precious metal to regain its luster for several years now. What's holding it back from hitting new highs? Plus, the market's recent broadening out has been a blessing for the Bulls. We'll tackle which sectors might best allow ETF investors to benefit from the wider breadth.

Here's my conversation with George Milling Stanley, Chief Gold Strategist at State Street Global Advisors, along with Todd's own, ETF and technical strategist as strategist research. George, I'll start with you. Gold bugs have been very frustrated by the inability of gold to decisively break above 2000 in the last three years. I think this is the third attempt. Gold ETFs, well, we've even seen some modest outflows in the last couple of months. So what's holding gold back right now? I think there's a couple of things. I think, you know, it's always a little difficult in any market to get through to a new big figure

and to make the change from something starting with a 1,000 to something starting with a 2,000. And we've been there a couple of times over the past decade without the ability to stick. I believe that the next time we make it, which will probably be later this year or early next year, I believe the next time we make it, we may well be able to stay over there and probably even see prices at a new all-time high above the 2017 or thereabouts that we reached a couple of years back. I think the possibility of recession is still very much in people's minds, even if some of the experts are starting to say that, maybe we might actually achieve Jerome Powell's soft or soft-ish landing. It's still very much in people's minds. I think if we did get a recession and the consequent weakness in equities, that would be very

helpful for gold. And even if we don't get a recession, I think it's pretty clear that we're liable to be in a period of slower growth. And historically, gold has always done well during periods of slower growth. So I think that, you know, that I think the signs are pretty good. The only problem is a lot of people expect to lull in the gold price during. the summer months. And I think this is, was historically the case.

20 years ago, when gold jewelry was 80% of total demand, then gold jewelry demand went very quiet during the summer, and so you expected a lot in prices. Jewelry these days, since the advent of gold ETFs revolutionizing gold investment, gold jewelry is only about half of total demand. So I don't think we should be expecting that low. But there are still people, speculative interests,

in particular, the hedge funds, perhaps, who sell in anticipation of a lull in the prices during the northern hemisphere summer. I think that's probably the main thing is holding us back right now. Yeah, George, I have known you since the gold DTF was floated 18 years ago. I believe you're with the World Gold Council back then, and I've never known you not to be thinking gold is near a new high. So one thing about you is you are absolutely consistent, every which way. Todd, let me bring you in here.

Some call crypto, Bitcoin, digital gold. This is the crypto community, not me. But is it? I mean, I'm curious about this problem. Has Bitcoin eaten into gold ownership? I tend to wonder if it's a demographic issue. Baby boomers perhaps don't see that, right? They like their gold.

They're perhaps a little scared of crypto. But Gen Z, some of the younger folks in our industry, I do think they consider it the digital gold of their generation. They like crypto. They like the way it is changing the world, perhaps in a way gold in a way, has changed the ETF industry 18 years ago. But I think the one knock against the digital gold argument is you just don't have enough history on Bitcoin and how it will act in different environments as we know how gold can

do over the last 50 years. Yeah, one thing is for sure. The investors believe gold has a monetary value. George, you have a new survey out. I wonder if we could put the full screen up here. You ask investors, does gold have a monetary value? 80% believe that it does. And of course, gold has a long history of use as money.

But only 41% said they understand what influences the price. This intrigues me, George, because frankly, I've been studying gold for 25 years, and I'm a little mystified what impacts the price here. So I just want to show you this other survey here. Go ahead. Give us a comment about what you think is impacting gold here. Is gold a hedge against inflation, for example? Yeah, look, gold. Gold is a hedge against inflation. Gold's a hedge against potential weakness in the equity market. Gold's a hedge against potential weakness in the dollar. There's a whole bunch of different things. To me, historically, the promise of gold for investors has always had a dual nature. One, that over time, not every year, but over time, gold can help to enhance the returns of a properly balanced portfolio. And gold can also help to reduce the volatility of a properly balanced portfolio. So,

If gold can help to enhance my risk-adjusted returns, I definitely want a small allocation to gold in my portfolio. On the digital thing, you know, maybe the generational thing is kind of important. There was a lot of talk a few years ago that people were selling gold and buying cryptocurrencies. We weren't able to see any correlation whatsoever between the price of Bitcoin, which at the time was the only cryptocurrency around, and creation redemption. activity in GLD, for example. We saw no correlation whatsoever there. And I didn't know of anybody who was doing that or of any advisor who was advising his clients to do that. I think the real

problem in terms of looking at cryptocurrencies as a strategic asset is that effectively the crypto universe lost two-thirds of a market cap of $3 trillion last year, going from $3 trillion down to $1 trillion. That, to me, does not suggest that volatility. does not back up any claims for cryptos to be a long-term strategic asset as a competitor to gold. And talking about time frame, we've had cryptocurrencies for 14 years. We've had gold for 6,000. That to me is a statistically significant sample basis for analysis in gold and not in cryptos. Yeah.

And I'm following up on your study here, if you can put this up here, 20% of investors own gold currently. of those that do own, it's 14% of their assets. That's interesting. And almost half of them own gold in the form of an ETF. So you're right, George. I mean, 20 years ago, obviously this would not be the case. Even 18 years ago, people owned physical gold. And the gold ETF has really revolutionized things.

As for the benefits of gold investing, I just want to put this up here because most people have two ways of owning gold reasons. Maintaining or increasing value in a downturn and some form of diversions. or a hedge against inflation. So the question, is gold a hedge against inflation? I'm not sure it is, or the evidence suggested it is, but people at least do believe that at this point, George. Yeah, look, let's address that inflation hedge one.

Gold does not offer any serious protection against sudden short-term moves in the CPI or any other measure of inflation. But what gold does and has done historically, But if you look just over the last 50 years, whenever inflation has been sustained at a high level, then gold has done very well. Let me define those terms in the interest of clarity. The sustained, I mean at least a two-year period and preferably longer, and at a high level, I mean inflation, CPI running at more than 5% a year consistently.

We haven't had that in this current bout of inflation. We're getting fairly close in terms of the timeframe, we're only a month or so out, but but we're now below that 5% level. So we haven't had sustained high inflation, as I've just defined it, this time around. So that, I think, is one of the reasons why gold has not done as well as a lot of people expected it to. I think there's a lot of misunderstanding

about the relationship between gold and inflation. Yeah, I want to switch and talk about the demand side, because to me that's the most interesting thing here. A lot of this gets very academic to me, But to me, the most single important determinant of gold prices is demand. And mostly it comes in the form of jewelry from the buyers in China and in India. So I just want to show this full screen about where gold actually goes, annual demand. 50% of all the gold that's manufactured in the world goes to jewelry.

And again, this is from the buyers mostly in China and India. And then there are investments like ETFs, for example. and then there are central banks at 15%. And then there's industrial, and those are mostly electronic uses. So, George, I'm wondering if you can explain this jewelry component here. So China and India are the two biggest consumers of gold jewelry. There was a decline in gold purchases during COVID, right?

That definitely affected the price, I would think. Yeah, no question. I mean, gold typically before COVID, gold was running anyway from a half to two-thirds of annual demand. That dropped to less than one-third during 2020 with the advent of COVID. We didn't see much in the way of a recovery in 2021. Many of us were optimistic. We might see a rebound in gold jewelry demand in 2022, but the world's biggest consumer, China, as you say, kept to its zero COVID policy until December of last year. So no significant rebound in gold jewelry demand. The zero COVID policy has gone away. We are still optimistic

that as and when the Chinese economy starts to really motor, it's not doing that at the moment for a whole variety of structural reasons. But as and when the Chinese economy really starts to motor, then I think we'll see that rebounding gold george or demand there. And as goes China, so go the rest of the emerging markets. It's not just China and India. It's Vietnam. It's Indonesia. It's Thailand and Korea. It's a whole raft of Asian countries that are really the main drivers of gold jewelry demand. And we haven't yet seen a big rebound there. But I believe that we will. That's part of the reason for my optimism about the price. And one of the things, you know, I did a special with you 12 or 13 years ago, George, where

on gold, where one of the things that truly struck me was how important gold is as a component of household wealth in China and in India. And there were parts of rural India still, where if a woman's divorced, what they own is their clothing and their jewelry. So I think people need to understand that component of gold as a piece of household wealth that it may not have necessarily in the United States

where it's largely decorated or a mental, but it's viewed differently in other parts of the world. Yeah, there are huge differences in jewelry. demand on Fifth Avenue or Rodeo Drive in this country, and then there's a very bizarre in India or in Shanghai or Beijing. Very, very different. And at our peril, we make the mistake of thinking that jewelry demand is homogeneous all around the world. That is absolutely not the case. It is culturally much more important, much more vital to people's lives in the emerging markets than it ever will be again in this country,

in the Western world as a whole. And I think that is one of the keys to trying to understand what drives the price. You put up that graphic earlier saying that 41% of people, only 41% of people felt they understood the drivers. The problem there is that the drivers change in nature. Sometimes investment demand is the driver, sometimes jewelry demand, sometimes even central bank buying can be very, very helpful for the price, as we've seen over the last 12, 13 years. So there's a whole raft of different things that drive prices. And it's really important to spend some time studying those or to talk to people who really understand them before making those investment decisions. You know, Todd, one of the things that's striking about gold ETFs, that the

investors now have a lot of choices when it comes to these gold ETFs. Now remember, they own physical gold. You're buying an ETF and it's backed by a physical gold. But the fees can really vary quite a bit here. There's fairly new products, or at least in the last few years new products from Granite shares and even State Street have a competing product that offer lower fees than the two giants. So GLD is far and away the biggest one. That charges 40 basis points. I shares gold.

IAU charges 25. But Spider, State Street has its own gold mini shares that charge 10 basis points. It's the same product. And Granite shares 17 basis points. Quite a difference there. It's the cannibalization that goes on within the ETF industry. You see it with gold. You see it with the QQQQQ.

We look at QQQM is five basis points cheaper, and that's taking in all the flows. So long-term gold investors need cheaper options, especially if that allocation continues to grow. And so Spider stay true to address that. Granite shares address that. And I think this is going to continue. You're going to see more and more free pressure for those less daily traded vehicles, but that still have access to those types of markets.

You know, I love how, George, you got ahead of the competition by launching the Spider gold mini shares. I think that was what five years ago that you did that and you essentially got ahead of the competition, right? Yeah, look, we were aware there was a general trend across the whole universe of ETFs, not just gold ETFs, toward lower expense ratios and lower share prices. And we wanted to offer people a product within the St. Street family and the World Gold Council partnership that we have. We wanted to offer people a product of ours within that space. So we launched GLDM with the view, with luck to being the leader in the low-cost space. We clearly achieved that the rest of the competition is basically virtually non-existed.

What we didn't expect, and we've been very happy to see, is that GLDM very quickly established itself as the third largest gold ETF in the United States, behind only GLD, the market leader because of its liquidity and behind IAU. And when we look at a straight up comparison between IAU and GLDM, the 15 basis point difference in the expense ratio is literally the only difference. The structure is exactly the same between the two. So GLDM makes a lot of sense there. We have the two products because a lot of investors want the benefits of the liquidity that GLD as the market leader has. That means that the spread between bid and ask on GLD.

is about one-tenth the size of the spread of any other gold ETF on a comparable basis. So if you want to rebalance to maintain a strategic allocation at a fixed percentage in a portfolio, then GLD is obviously your vehicle. If you want to trade on a regular basis, on a tactical basis, then again, GLD is your vehicle. If you simply want to put a fixed amount of money into a gold ETF and put it over in the corner and forget about it, happy that your cushion is there if ever you need it. GLD then comes into its own with that 10 basis point expense ratio. That's exactly the way that investors have been telling me that they think about them. A lot of investors out there own both products, one for a long-term strategic

allocation and the other for something they want to rebalance on a regular basis. It makes an awful lot of sense. It does. I mean on a daily, if I'm an active trader, I'm not, who cares about 40 basis, for I'm trading in and out on a daily basis. I don't care. I want tight spreads. I need liquidity. There it is. There's GLD.

And this is true of other products that are out there and other asset classes. If I don't care, I don't want to pay 40 basis points. I want to put it away for five or 10 years. I get 10 basis points. It's all time frame. And I think it's interesting, too, that the gold ETF space is also seeing buffered ETFs come into play, your option income play. So let's just say gold stalls out for however long.

You're still generating income through those other ETF products. so more accessibility for investors out there interested in that space. While I got you here, I want to ask you a non-gold question. Let me ask about this broadening out of the market. I keep talking about this day after day here at CNBC, where tech is no longer so dominant, and instead we're seeing other sectors, energy, materials, industrials, healthcare, come on stronger.

How are ETF traders playing this? What are you seeing? So the great part about ETFs, if you are busy on the road talking to clients, you just need to look at a few ETFs to gauge participation. The Equalate S&P 500, RSP, the Russell 2000 IWM, and the Vanguard extended market VXF. That's all non-SMP 500 ETFs.

Each of those are trading at multi-month highs, close to six-month highs, even more. I think VXF actually hit its highest in about a year and a half last week. So the consternation over the mega-cap tech names driving the market, I understand it, but we're seeing participation start to pick up down the cap, So it's really important for the durability of a bull market. Yeah, here's one of my favorites. This is the Vanguard extended market, VXF. And essentially, this is mid and small cap stocks.

I think what they do is they take the S&P 1500 and just take out the S&P 500. Exactly. And so you've got a whole bunch of big mid-cap stocks. And you can get names, I think Blackstone's in here, Snowflake, Airbnb. Very large mid-cap stocks don't quite, you know, cut. I think it's a very under-the-radar fund, too. You think of Vanguard. You think V-O-O, V-T-I, their fixed-income products.

VXF's down that list in terms of AUM, but is a very important tool in assessing market conditions. Yeah, so there is, again, example, how you can play this. The RSP is perhaps the most popular product that's out there, and that just all S&P 500 stocks, 500 are equally weighted, not like the SEP, which is market-capped, and that's been outperforming, finally. So the broadening story actually is happening. It's not just a bull's wish. You know, they've been hopeful, dear God, please broaden the market out. So it doesn't all happen with tech stocks. The broadening story is happening, which is important for the overall market.

And then if you're trying to play it tactically, you say, you know what, I'm good on my tech. That's probably going to pull in because it had such a great run here. Well, RSP is good because you're going to get financial, energy, material, industrial exposure. And that's kind of a catch-up and a value tilt in the way for the second half. Yeah. It's a terrific story. And we'll be on it, of course, as we go into earnings season. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETS.

This is the Market's 102 portion of the podcast where we continue with conversation with Todd's own comes to TECIS research. And Todd, we were talking about the playbook for the next quarter. And I think the most interesting thing here is the Bulls are getting their wish. We are seeing a broadening out of the market. What do you see happening in the next couple of quarters? What, say, sectoral ETFs do you see some inflows and potential for? Yeah.

So two that come to mind for me are. energy. I know that may be hard to stomach a little bit because the performance hasn't been great recently, but you have had what I would describe as an exodus from outflows from the energy ETF specifically, the XLE, billions and billions of dollars here. So if you're looking for a contrarian play on the long side, XLE would be the one of that. And that would also fit with the value tilt that equal-weighted indices offer. And I would also consider health care. Now, that's more of a defensive play if the market's at a speed bump here in the third quarter for whatever the catalyst might be. But a lot of investors have also left healthcare because of how inconsistent

its relative performance has been. But it's a very low beta sector. So if you are feeling a little bit queasy given how far tech has run, I think that's another place to allocate that a lot of investors have ran away from over the last six to 12 months. Well, part of the problem with healthcare is it's so diverse. I mean, you have, you've got pharmaceutical stocks. You have HMOs and managed care stocks, you have hospital stocks, you have biotech stocks that can go in, some of them go into health care. That's a pretty diverse group. But then you have medical devices. And you have surgery makers, surgical device makers. That's a pretty diverse group. They don't move at the same time. It's a blessing and a curse. So the blessing is you don't have Apple and Microsoft, which can

bring up your sector, but also drag it down if something were happening. But the curse is you also don't have those heavyways to push around the sector. And so I think it's, I think it's If there is an event, a catalyst that causes the markets to get a little uneasy, the most important weights in healthcare being the pharma and the managed care names will likely trade together in sync, which ideally would be higher in that scenario, defensive scenario. Now one thing we're not seeing flows into is technology. It's been astonishing to me that tech's the big gainer this year, not this month, but generally tech's been the big gainer this year, and yet we're seeing outflows from some of the

biggest ones, like, XLK is the tech ETF, right? There's been outflows this year. And astonishingly, Kathy Woods' arc fund, which had stable ownership all throughout last year when it was getting clobbered, this year it's doing much, much better and it's seeing outflows. Can you explain this to me? This is investor psychology basically 101. You kyle in when things are doing well, and when things don't go so well, there's some

outflows on the way down. But now that the funds have rebounded, I think you're seeing bagholders start to say. sell them the way up here rather than those excessive infalless of back in 2020 and 2021. And what to me, in terms of reading on sentiment, when money starts coming back and mass to those funds, I think that's when you can start to get really worried that maybe things are getting a little too optimistic.

But for now, I don't see it too off sides, especially with You know, I have a book out called Shut Up and Keep Talking, which is about what I've learned down here almost 30 years on the floor of the New York Stock Exchange. And one of the things that I became very good at was behavioral psychology. Behavioral psychology, as you know, Todd, purports to show how people really behave, not how they're supposed to behave. And in the rational world, people buy high, buy low and sell high. In the actual world, they don't do that. They buy high and sell low.

So here you have an example of people sticking by Kathy Wood last year when the stock was way down, not selling at all. We saw no outflows. All of a sudden, we come into 2023. She's doing much better, and now they're selling that it's moving up. So it's not buy low, sell high, it's buy high and essentially dump out when it's, when you see the thing, you know, start moving up again. Yeah, when you can finally get, you know, getting back to even. And I think it re-empses, hey, trading is hard. But the message for me there is these tech names are back, but they're not being embraced like they were two or three years ago. Maybe that's the most important takeaway here.

These tech names, while they're very overbought in some cases, they still have room to run. Yeah, good point. You talk about the broadening participation. There's a couple of EETFs that allow you to like take out tech. Yeah. So, for example, there is an S&P 500 X tech. It's SPST. That's Samuel, Peter, Xilophone, Tom.

And essentially, it's the S&P minus technology stocks. That's been doing better recently. And then there's even a NASDAQ-100 Q-QXT, which is the NASDAQ-100, you might think, well, isn't the NASDAQ 100 the tech sector? But you've pointed this out, more than half of it is actually not tech stocks. Yeah, you have industrials, you got healthcare in there, you got some consumer discretionary. It's a little more diverse than just Apple, Microsoft,

and Vida, and whatnot. And these are more tools to measure how participation is going. And these funds are going up. That's how bull markets are made here. And it's also just shows you can go deep in the barrel of ETFs to get different kinds of exposure. And so it's so great about them. Yeah.

I think the important thing is, that a lot of people were betting how unlikely a rally in the second half of the year was. And a lot of people were saying to me wait till the summer comes. And it's true. I mean, historically, you've been around a while. The second half of July, all the way to October, that's like the weakest two and a half months, three and a half months of the year. August, I think, is the third worst month.

September is the worst month. So you're in the seasonally week period. And yet so far, we keep holding up. We'll see how we go with these tech earnings this week. week. There could be speed bumps along the way, especially after a great first half, but you're almost 10 months off the October low. You should feel pretty good about where things stand in terms of a bull market.

All right, everybody. Thank you for joining us to Todd. Thank you again for speaking around. That's it for today. I'm Bob Fassani. And thank you for listening, everybody, to the ETF Edge podcast. InvescoQQQQ believes new innovations create new opportunities. Become an agent of innovation.

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