SPDR GLDM ETF: Stronger Levels Than It Deserves

The SPDR Gold MiniShares Trust (NYSEARCA:GLDM) is a fine and low-cost way to get exposure to gold. The question is whether that’s what you want right now. We’d venture to say that you wouldn’t. During the first throes of the COVID-19 crash, questions about reserve currencies amid even more aggressive monetary easing made gold seem like a relevant alternative. The reserve proposition has reversed now that USD can offer yield in treasuries and strength in its restored status as the world’s reserve currency, being one of the strongest currencies in the world this year. Moreover, the rate hikes threaten assets that can’t generate yield like gold. A 6% YTD decline seems pretty limited given the threats to gold. At any rate, the increment looks poor so we’d avoid gold right now.

Gold

Gold was already under pressure as rates rise. Indeed, we’ve seen several 75 bps increases in reference rates that have taken risk-assets down a peg in the US, but other currencies as well are seeing their monetary authorities raising rates. The problem for gold is that as a wealth of currencies can now yield better returns when acquired through treasuries or bonds, and as that happens the demand for gold, despite its safe haven status in a risk off environment, falls.

COVID-19, the rise of cryptocurrencies, conspiracy concerns and general concern with monetary policy in response to what were arguably self-inflicted pains related to disease response were concomitants with falling credibility of governments and their currencies for many. This elevated gold, especially as market actors speculated around gold in the event that risk-off inducing events were going to hit. In the end, the Ukraine invasion and the effects of sanctions have been the sources of volatility, and gold has remained pretty strong on that basis only declining 6% YTD, but quite a bit more from the peak of gold in March 2022.

While the case for safe havens remain, the credibility of the dollar has risen back again. With Russia’s share of trade falling and the US taking its place, and the higher rates on treasuries finally justifying it and the USD as a deposit of low risk but modest returning funds, the USD has been performing remarkably strongly and is a justifiable fund sink. The gold as a reserve proposition is no longer a factor.

The more pressing concern is that core CPI continues to rise. The jobs report a couple of months prior saw to that, with jobs still being added and hiring continuing despite the Fed’s best efforts. The Phillips Curve is back and unemployment needs to rise before inflation, which can self-propagate, is tackled. With jobs staying strong and CPI resultingly increasing, more rate hikes are coming. While the tantrum a few days ago and the 5% correction in US indices reflects expectations of another 75 bps rise in rates, it could end up being 100 bps, and we could see more after that still. In other words, the gold proposition erodes on the increasing yield of competing securities, and therefore is another vector for gold’s decline.

Conclusions

GLDM has low expense ratios at 0.1%. For reflecting the price of a physical asset, that is pretty low, and a virtually costless way to get gold exposure. Unsurprisingly there isn’t a discount to speak of, but for getting exposure to a speculative factor it does the job. Also the liquidity is superb. The problem is gold is not an exposure we want right now. A lot of the factors that helped it during COVID-19 are gone or are eroding, yet the price still hovers in the trading range, albeit in the lower part of it, around these latest highs. Forces could mount against it, and we’d avoid the exposure right now.

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