With fear becoming the dominant sentiment in the markets, it’s only natural that interest in the gold bullion-focused exchange-traded fund SPDR Gold Trust (NYSEARCA:GLD) would spike. After all, gold glitters when everything else does not. However, this time-honed thesis hasn’t quite panned out. Like most other investments, the GLD ETF has dropped significantly against this year’s closing high.
Nevertheless, the GLD ETF has been performing significantly better than the benchmark Dow Jones Industrial Average. While the Dow dropped nearly 30% year to date on the Monday bloodbath, the gold-centric fund was less than 2% off parity during the same period. Obviously, this is a massive difference between the two, which indicates shifting sentiment toward the yellow metal, despite the volatility.
But can you trust the Gold Trust? I’m biased, but I believe you can. I’ll give you the simple answer and the more complicated (and wonky) answer.
First, you can simply look at the broad fundamentals. From Apple (NASDAQ:AAPL) to Nike (NYSE:NKE) and everything in between, retailers are either temporarily closing down or adjusting their hours. Shockingly, though not surprisingly, McDonald’s (NYSE:MCD) will close their dining rooms in U.S. locations. This aligns with the Trump administration’s guidance to shutter restaurants for approximately a two-week period.
Unfortunately, it’s a gross overreaction to the coronavirus from China. In 2009, the H1N1 virus infected many millions and killed 17,000 Americans. But even if the coronavirus was only a perceived threat, the bottom line is that the fear is real. And when you’re scared, you’re liable to do crazy stuff, like buying the GLD ETF.
Likely, this very event will occur because our social paradigm has been completely uprooted. Why wouldn’t you buy gold?
Gold Is the Ultimate Hedge
Now, for the more complicated answer: gold (and in theory, the GLD ETF) is the ultimate hedge against economic turmoil.
On a very basic level, gold has universal intrinsic value. I could go back to year one and I know that my gold would be worth something. But on a deeper level, the precious metal protects against fiscal erosion.
Between 1970 (the U.S. went off the gold standard in 1971) through 2018, the correlation between gold prices and real GDP was 79.3%. During the same period, the correlation between gold and real GDP per capita was 75.4% — that’s a high-low spread of 5.2%.
But the correlation starting from 2000 to 2018 shows a marked and widening gap. For gold to GDP, the correlation was 80%. For gold to GDP per capita, the correlation was only 70.35%. Here, the high-low spread is 12.3%. My interpretation is that Main Street is steadily falling behind Wall Street in terms of market share of national prosperity.
Further, this view becomes more evident when you consider average growth of GDP and GDP per capita over the decades. Between the 1940s through the 1960s, the high-low spread of nominal and per capita GDP growth averaged 49.7%. From the 1970s through most of the 2010s (2019 data is not included), the spread widened to 59.8%.
If I haven’t lost you, here’s what the numbers demonstrate: whatever growth is occurring in the U.S., most of that is enjoyed by Wall Street fat cats, not the average Joe. Of course, that has always been the case. However, my argument is that this circumstance is worsening in recent decades.
To bring it full circle, there are few investments that level the playing field like gold; hence, my bullishness toward the GLD ETF.
Things to Note About the GLD ETF
Browse the internet long enough and you’ll come across a group known as “gold bugs.” Although you can’t generalize such a big demographic, gold bugs tend to be armed and conservative.
Personally, I don’t think there’s anything wrong with being armed and conservative — please, stop typing! What I’m saying is that you’ll hear the argument that the GLD ETF is a “paper” investment on gold. It’s not the actual metal itself.
Without getting into all the granularity — which often times spills into conspiracy theory territory — the short answer is the gold bugs are correct. With the Gold Trust, you’re banking on price movements as opposed to building your portfolio for the apocalypse.
I don’t think the world is coming to an end. But I do think gold has substantial upside potential because fear begets fear. Plus, the longer we shut down — either voluntarily or involuntarily — the bigger our economic problems become. So, given the micro- and macro-arguments, I love the GLD ETF.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he is long gold.