Is the GLD ETF a Good Long-Term Bet?

Is the GLD ETF a Good Long-Term Bet?

The SPDR Gold Shares (GLD) is a high-quality exchange-traded fund (ETF). Will it will remain a high-quality investment over the next year or the next several years for that matter?

Gold Bugs

Gold bugs are everywhere these days. They’re everywhere because they know that the global economy is much weaker than advertised, and that the only reason the economy has been “recovering” has been due to central bank intervention. Domestically, the Federal Reserve has added approximately $4 trillion to the economy via quantitative easing, but it hasn’t translated into much inflation. And that’s the key point when it comes to gold. In the past, the Federal Reserve would do what it could to curb inflation. In recent years, it has done everything it could do fuel inflation in order to prevent deflation. (For more, see: Breaking Down the Federal Reserve's Dual Mandate.)

This is very important when it comes to predicting the future course of gold prices because gold only appreciates in inflationary environments. If you’re thinking back to the financial crisis, then you might be thinking incorrectly. Immediately after the crash, we were in a deflationary phase for several months and gold plunged. The only reason it took off all the way through the summer of 2011 is because the Federal Reserve was just getting started with its monetary policies, which at that time had an actual impact and created artificial yet temporary inflation.

The situation is much different today. Not only has the Federal Reserve’s more recent moves been less effective, but it’s now seriously considering raising rates, which is good news for the U.S. dollar and bad news for gold. In addition, if interest rates move higher and borrowing costs increase, it will speed up the time frame for underlying deflation to become an accepted and realized reality. (For more, see: The Effect of Fed Fund Rate Hikes on Gold.)

GLD Potential

GLD should be on every trader's and investor's watch list. This is a well-designed ETF that comes with a relatively low 0.40% expense ratio and offers plenty of liquidity with an average daily trading volume of 5,720,720 over the past three months. I also simply tracks the performance of gold bullion and is not complicated like many other ETFs. Since its inception on Nov. 18, 2014, GLD has appreciated 129.37%. However, it has slid 12.72% over the past year.

The bad news is that trend for GLD is down. Aside from short-term spikes, the trend will remain down. If the Federal Reserve couldn’t create sustainable inflation when printing money, there will be no sustainable inflation when the Federal Reserve is raising rates. A hike in interest rates will also increase borrowing costs, which will speed up the deflationary process as more corporations look to cut costs in order to deliver on their bottom lines. Reduced headcount will be the path most often taken, which will then reduce consumer spending and lead to consumer-focused companies having to lower prices for their goods and services. This will then lead to further cost-cutting, and many people will have to find lower-paying jobs. This is all part of the deflationary cycle, and it's not good news for gold or GLD. (For more, see: GLD vs. IAU: Which Gold ETF is Better?)

The Bottom Line

Gold is not a safe hedge against deflationary pressures. Most investors don’t understand this because they have never seen deflation for a prolonged period of time and because gold is traditionally a safe hedge in an economic crisis. However, there will be no inflation at any point in the near future and GLD is not likely to appreciate over the next several years. That said, keep it on your watch list for when the deflationary cycle bottoms, the majority of massive debts are paid off, and organic economic growth returns. This isn’t likely to happen for many years but when it does it should lead to rampant inflation, which could lead GLD much higher. (For more, see: (For more, see: What Drives the Price of Gold?)