The SPDR Gold Trust tracks the performance of the price of gold bullion, less the Trust's expenses. Due to gold's low-to-negative correlations with traditional asset classes as well as with major economic variables, it is a proven asset diversifier. Gold is widely perceived as a safe-haven investment. It holds its value despite large changes in the stock market. However, the acquisition and storage prices of gold bullion make it prohibitively expensive for most people to own any. SPDR Gold Trust solves this problem by accepting deposits of gold bullion and distributing shares in return. The shares are meant to approximate the gold market as closely as possible.
It is important to note that investing in gold does not just include bullion; gold jewelry holds its value just as well--it makes up 25% of worldwide gold supply. The 2007 Credit Crunch led to a loss of consumer confidence as well as an increase in gold demand--investors sought out the investment they felt was safest. This initially caused gold prices to rise. However, the strengthening U.S. dollar has led to a decrease in sales as the stronger dollar has led many to seek out liquidity and sell their assets.
SPDR Gold Trust was created in 2004 by the World Gold Council as StreetTracks Gold Trust. Then Chairman of the World Gold Council, Christopher Thompson, wanted to find a way for the average person to be able to invest into gold. He hired James Burton, former CEO of CalPERS (California Public Employees' Retirement System) to research the feasibility of a tradable financial product investing in gold.
Bars of gold were large, heavy and required expensive security to maintain value. Prior to SPDR Gold Trust, the most successful gold product was the South African Krugerrand. The Krugerrand was a gold coin created in the 1967. It came in a variety of troy ounce weights. While buying Krugerrands required less security costs and easier transportation costs, it was still a physical product. Held in great amounts, it faced same problems as gold bars.
In late 2004, SPDR Gold Trust started trading as StreetTracks Gold Trust, Bank of New York was its trustee. State Street Corp. marketed the fund.
SPDR Gold Trust (started in 2004) is an investment trust. The Trust holds gold and issues SPDR Gold Shares in blocks of 100,000 Shares (Baskets) in exchange for deposits of gold and distributes gold in connection with redemptions of Baskets. The investment objective of the Trust is for the Shares to reflect the performance of the price of gold bullion. Originally, the details of buying, storing and insuring gold have made it difficult for most investors to enter the gold market on their own. SPDR Gold Trust solves this issue by creating securities that follow the gold market.
The Trustee values the gold according to the most recent London PM Fix. The London Fix is a widely-recognized benchmark for gold and silver prices. It is announced twice each day: the AM fix occurs in New York City at 5am (10am in London), and the PM fix occurs in NYC at 10am (3pm in London). Once the gold has been accurately priced, the Trustee then subtracts all accrued but unpaid fees in order to arrive at an Adjusted Net Asset Value (ANAV). The Trustee then uses the ANAV to calculate GLD's fees (to the Trustee, the Sponsor, the Custodian and the Marketing Agent) to arrive at the Net Asset Value (NAV).
As mentioned before, gold tends to retain its value despite movements in the stock market. Therefore, gold serves as insurance against a risky stock market. This has made gold a very attractive investment. The 2007 Credit Crunch made gold even more attractive as investors hurried en masse to the asset they felt was safest. GLD's holdings increased by 26% since Lehman Brothers (LEH) went bankrupt. There is an inverse relationship between the economy and the gold market: the worse the economy becomes, the more money goes into gold as a safeguard against losing more money.
As of July 2010, gold prices are down more than 5 per cent from their June highs. Some traders buy gold as a hedge against instability in other markets on the belief that the precious metal holds its value better than other assets during economic turmoil. While some speculative investors have liquidated their holdings in gold recently as equities and currency markets stabilized, there is still enough worry about the global financial system to keep support under prices.
Despite gold's recent weakness, analysts estimate gold will remain at about $1200 an ounce as investors wait for decisive direction from other markets before making bets on gold. Large gold funds have slowed their physical purchases, but generally haven't sold them as a wait-and-see mentality continues. Gold prices have also been lifted by a decline in the euro as European banks are subjected to stress tests. Gold has benefited recently from weakness in the euro as investors use gold as a hedge against a loss of purchasing power in the European currency.
There are three main sources of supply in the gold market: sales of gold reserves from major banks, gold that is mined directly from underground, and gold that has been separated from melted-down scrap jewelry. Not only does scrap jewelry form a considerable portion (25%) of gold supply, it is also the fastest to respond to a change in demand. Therefore, scrap gold can act to moderate fluctuations in the gold price by providing additional supply if needed. The supply of scrap usually increases when gold prices rise or economic conditions worsen. Although GLD makes it easier to participate in the gold market by eliminating the need to hold gold bullion, it is still possible for individuals to invest in gold simply by buying jewelry.
SPDR Gold Trust is the largest gold trust on the market and its main form of competition includes other forms of gold, namely gold bullion, jewelry and electronics. Bullion is very expensive to maintain for individual investors; it is more commonly held by central banks, such as the International Monetary Fund and government banks. Another source of gold is jewelry and electronics. Jewelry is a more accessible route to owning gold; it can either be kept whole or melted down and turned into bullion or sold for cash. Some electronic devices use gold as well, which can be separated from the rest of the device.
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