As Q3 2019 was winding to a close, SPDR Gold Shares (NYSEARCA:GLD) was handily beating the S&P 500 index for the quarter and the 12-month return, as the momentum looks to continue for GLD for several quarters to come.
Although the year-to-date returns show that GLD is behind the major market indices for calendar year 2019, smart investors need only dig a bit beneath the surface to unearth the shine on this precious metals exchange-traded fun. As of this writing, with only a few trading days remaining in Q3, GLD had a gain of 7.9%, whereas the SPDR S&P 500 ETF (NYSEARCA:SPY) was up only 1.2%.
For the past 12 months, GLD has jumped 27.4% in price and the SPY only had a gain of 3.7%.
When we look back on the 1-year returns ending Dec. 31, 2019, GLD may still lag the major market indices and a few of the leading sectors. But the real story is that GLD has been an outstanding diversification tool since the end of Q3 2018 and will likely remain a smart holding through 2020 and beyond.
Why GLD Remains Among the Best ETFs to Hold Now
Economists and market observers may not agree on forecasts for the timing of the next recession but there’s no arguing the fact that the U.S. is in the mature phase of the business cycle and the global economy is slowing. In this environment, investors are wise to reduce exposure to risk assets, such as stocks, and increase exposure to defensive assets, such as gold and bonds.
More specifically, here are some compelling reasons to hold GLD now:
- Slowing Global Economies: Just because the U.S. is not in a recession (yet), doesn’t mean defensive investments like GLD are not a good idea. European and Chinese economies are slowing or were in recession in 2019. Not only does this drag on the U.S. economy but it increases demand for safe havens like gold.
- Increase in Negative Debt: An environment where interest rates are falling is often the same one where the price of gold is rising. During Q3 2019, central banks around the world were lowering rates, in some cases below zero, to fight recession. When yields are negative, it means that the issuer is paying the investor to borrow money. The level of negative debt reached a record of $17 trillion globally during Q3 2019.
- Tariffs and Uncertainty: The greatest enemy of stock prices is uncertainty. But this same enemy is a major support for higher gold prices. The greatest driver of uncertainty now is over the tariffs and the ongoing trade dispute between the U.S. and China. As more time passes, negative impacts will be felt by consumers and businesses. This also impacts consumer confidence and business hiring decisions in the near term. Consumer activity is two-thirds of the U.S. economy; therefore, if consumers don’t feel confident about their money or job security, they’ll put off purchases they would have otherwise made.
In summary, as long as there remains a global backdrop of easier monetary policy for central banks, gold will remain a smart hedging tool or defensive investment play. However, it’s generally not a good idea to allocate too much of a portfolio’s assets to this or other precious metals. Along with other defensive investment ideas and certain sector bets, an allocation of 5-10% can effectively reduce volatility and market risk in your portfolio.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. However, he holds GLD and SPY in some client accounts. Under no circumstances does this information represent a recommendation to buy or sell securities.
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