IAU: Gold Might Be Going, Going, Gone. Long-Term Breakout Potential

By Rob Isbitts

I can’t remember the last time I had a gold allocation in my personal account. But I do now.

As a macro-oriented ETF strategist, I am well aware of gold from a historical, fundamental and price trend standpoint. Though as some would argue, gold has no fundamental value. For centuries it is worth whatever someone would pay for it. Yet that made it the “go-to” choice in decades past, to fight inflation, to substitute as a form of currency versus the US Dollar, and to play the role of “last resort” asset in case the global financial system reached the point where we would all go back to using hard assets instead of paper currency. Gold has quite a history as an asset class, and ETF investors have had access to it since late 2004, when SPDR Gold Trust ETF (GLD) debuted. In early 2005, its rival ETF giant debuted its own gold ETF, iShares Gold Trust (NYSEARCA:IAU).

The past few years have seen the price of gold languish. In fact, since investors started to get over the shock of the pandemic in late spring 2020, gold has traded in a range. That would not be so abnormal compared to gold’s history, except that as you can see, inflation on a year-over-year basis accelerated from practically zero to its recent peak around 9%, and still sits at an uncomfortably high 6% as of the most recent reading. This is an environment in which IAU and other gold-linked ETFs should have shined. Instead, you can see a nearly 3-year trading range in this ETF.

Why did this occur? I am confident there are many theories about this, and there’s no way to know what the true reason is. But I believe the truth goes something like this:

1. Inflation had been so dormant for so long, the market just didn’t take it seriously at first, and…

2. …When it became apparent that inflation was likely going to be sticky in the 4-6% range, the cryptocurrency frenzy was in full swing. Yes, the price of Bitcoin went parabolic and then came crashing down, only to re-emerge very recently. But the demand for crypto, and the vast industry that has shown tremendous resiliency, even while some doubt its long-term viability, simply took “market share” away from the gold trade.

Here’s the dramatic rise and fall of Bitcoin over the past several years, and the tame (by comparison) movement in IAU. The move in the former makes the gradual ascent by the latter look flat, since it crushes the scale of the chart.

But more recently, IAU has been steady though not spectacular. Here it is versus Bitcoin since the start of 2022. For 2 asset types that are sometimes considered in the same peer group (e.g. Bitcoin is the new gold for investors, etc.) that’s quite a contrast in price trend styles, so to speak.

3. The inflation story is not going away, and that seems to be driving the recent breakout in gold. I am a technician at heart, and I can’t deny what I see in the charts when there is a growing, logical macro case building around it.

From a combination of macro, market sentiment and technical evidence, I think this is the best chance IAU has had to break out meaningfully, long-term. That’s why I am taking part. I rate IAU a Buy here, but also realize that any such rating can be knocked down in this frenetic market environment.

Strategy

IAU offers investors a convenient way to hold physical gold without storing gold bars somewhere in your house or a vault. It is structured as grantor trust.

Holding Analysis

IAU holds physical gold. The underlying gold bars are stored held in vaults in several different part of the world, and IAU’s website makes available an inventory list available on the Issuers website.

Strengths

IAU tracks the price of gold bullion quite well, and thus is a fine surrogate for owning gold outright. Plus, it is as liquid as any ETF, with about $27B in AUM, and an average daily trading volume of around $200mm.

Weaknesses

IAU is part of a gold ETF duopoly along with GLD. That pair combines for over $80B in assets, so GLD is the largest by far. Other gold bullion ETFs are much smaller. But while size may be an advantage, there have been concerns at times that these 2 ETFs are at risk of being too big. Gold is in limited supply, which is part of its investment appeal. But to the extent that IAU and GLD are considered to be “the gold market,” concentration can bring potential risks.

Opportunities

The combination of conditions described above prompted me to jump into gold via an IAU position on March 15. Importantly, I did what I often do in markets like this: I bought a modest position in that ETF, but that was 2 days after I had tested the waters via the purchase of out of the money call options at a $180 strike price. As it often the case when markets are in turmoil, when you are on the right side of things it can move quickly. Those $180 calls were sold at a profit to buy $190 calls, and those were sold at a profit to buy $200 calls.

But that’s trading, not investing. The point of relating it here is simply to explain that the initial lift off in gold and IAU may have begun. The IAU position reflects my view that this ETF has at least has a chance to do something it has not been able to do: take out its 2020 high of around $39.

Threats

To be clear, those trading profits are just a way to try to take advantage of the potential for bigger things later. But the one thing that has most characterized this bear market in stocks, bonds and now some commodities is that moves in either direction are fleeting. They don’t last. IAU has a chance to break through and return to its historical role of anti-inflation investment and place of refuge in a financial crisis, should the current banking industry concerns linger (which I think they will).

Conclusions

ETF Quality Opinion

IAU is a must-follow, given that gold is a must-consider for macro investors like me. It is a regular part of my watchlist, along with GLD and some smaller gold ETFs not covered in this report.

ETF Investment Opinion

As noted earlier, I am not a natural gold fan. But I am all about reward/risk trade-off, and I like what I see here. It is all lining up for IAU. But it remains to be seen if this is just another false alarm rally, similar to the many we have had in the stock market since the start of that bear market in early 2022. I rate IAU a Buy.