Still Golden: GraniteShares Gold Trust AUM Increasing Rapidly
Gold is valuable in uncertain times because it is scarce and cannot be manipulated like paper currency.
GraniteShares Gold Trust, a relatively new gold ETF, offers investors a low cost way to own gold.
Recent increases in this ETF's assets under management should address concerns that many investors have had concerning the liquidity of this ETF.
Recent Fed dovishness bodes well for gold.
Gold makes sense in times of uncertainty and in times of fiscal profligacy, and I believe both conditions exist in the US in our present moment. Thus, I am bullish on the yellow precious metal.
Gold's Scarcity
In an earlier article on GraniteShares Gold Trust (BAR), a relatively new gold ETF, which I find very attractive as a vehicle to gain exposure to gold, I wrote the following:
Gold is scarce. It takes a lot of effort to find it, mine it, and refine it, and to do so can only be done at considerable cost. It cannot be printed or created electronically. In short, compared to paper money which can be printed without limit and/or created electronically, gold is a very scarce commodity.
Of course, most people hold all of their reserves in cash and bonds, and I have generally done the same. Technically speaking, however, cash reserves held in the bank and government bonds are claims and promises but not genuine assets like gold. Or to think about it another way, there is no counterparty risk when it comes to gold. It is not a claim for something else, a promise to receive something or someone else's liability.
Gold does not perish. Throughout history, it has withstood financial crises, political instabilities, and rampant money printing by central banks, in large measure because gold is essentially outside the financial system. It is thus not surprising that Ray Dalio of Bridgewater, one of the world's most successful investors, has been recommending that investors maintain 5-10 of their assets in gold to hedge against financial and/or political instability."
The foregoing summarizes well why I think it makes sense to own gold. However, in the prior article I wrote on BAR, I received a lot of feedback from Seeking Alpha readers about the fact that they were uncomfortable with owning BAR shares because of its relatively small size and lack of liquidity relative to some of the larger gold ETFs like GLD or IAU.
Those were fair comments, but I think the situation is changing (and fast) because BAR is committed to being the low-cost provider and its fees are substantially lower than the fees of many of its competitors. Indeed, if you are going to have an ETF allocation to gold, why would you pay someone 20, 25, 30 or even 40 basis points as a fee when you could own BAR shares and pay less than 18 basis points. Money will go where it is treated best, and right now, if you want exposure to gold, your money should flow into BAR shares.
BAR's Increasing AUM and Liquidity
Styling itself as a disruptive ETF company, GraniteShares has become one of the fastest growing U.S. asset managers. The Granite shares CEO, Will Rhind, commenting on recent increases in assets under management (AUM), noted in a press release that:
We founded GraniteShares to provide simple, cost effective access to commodity and alternative investments . . . . We're thrilled with the investor appetite for our ETF suite thus far, and remain committed to providing the best-in-class solutions to our clients."
Notably, in that press release, the recent increases in AUM for Granite Shares was largely attributed to BAR. Specifically, AUM for BAR has increased to $430 million, including $113 million in 2019 alone (in each case, figures are as of January 28th).
As of this writing, the Seeking Alpha quote page for BAR shows AUM for BAR of more than 447 million. With the increase in BAR's assets has come an increase in BAR's liquidity, and I would expect this trend to continue.
Fed U-Turn
About 7 weeks ago, the Federal Reserve, through its Chairman (Jerome Powell), put the market on notice that it should expect further increases in US interest rates in 2019. A market writer I follow and respect, John Mauldin, penned an article concerning the Fed's action titled "Powell may mark the beginning of an independent fed."
Not so fast!
On January 30, 2019, the Federal Reserve Federal executed a sharp policy reversal, leaving its reserve rate unchanged at 2.25-2.5%. Moreover, and to my astonishment at least, the Fed's written statement left the door open to the next move by the Fed actually being a rate cut instead of a rate increase. Previously the market was expecting two rate increases in 2019.
Writing about the Fed's aburpt U-turn, Doug Noland's Credit Bubble Bulletin analysis nailed it in my view:
Circumstances forced the Fed's hand. Old fears soon reemerged of escalating market instability getting ahead of the Fed. Better to act quickly before market/liquidity issues turned intricate and precarious. While not blatantly shock and awe, kind of along the same line. And responding to criticism of blurred messaging, the course of FOMC policymaking must appear coherent and decisive.
There will be no more rate hikes anytime soon. Now heeding market alarm, the Fed will also be reevaluating the runoff of its securities holdings. The Fed would prefer to convey that it remains "data dependent" in an environment of extraordinary uncertainties, while tepid inflation provides convenient cover for embracing "patience." Well enough, but markets saw it for what it was: The Fed "caved" - just as the markets knew it would. No longer in doubt, the latest incantation of the "Fed put" is alive and well (irrespective of job or GDP growth). Indeed, the new Chairman's hope for lowering the "put" strike price (Fed support not invoked before a significant market decline) was rather hastily quashed by acute market fragility." [Emphasis Added]
The crux of the matter: The Fed has shifted to a dovish posture and this will be positive for gold -- another reason to accumulate BAR shares.
BAR Basics
According to the sponsor's website, BAR shares are designed to seek the performance of the price of gold, less trust expenses. With an expense ratio of 0.1749%, BAR is the lowest-cost, physically-backed gold ETF on the market. Rivals GLD, IAU, SGOL, and GLDM, for example, come in with expense ratios of 0.40, 0.25, 0.39, and 0.18, respectively.
BAR shares are held in trust (the "Trust") for the benefit of shareholders. BAR shares are backed primarily by allocated physical gold bullion identified as the Trust's property in the custodian's books. The Trust's contractual arrangements require that BAR shares cannot be issued unless the corresponding amount of gold has been deposited into the Trust.
Bottom Line
1) I remain long-term bullish on gold. (Do see my prior article on BAR shares linked above.)
2) BAR shares are the low cost, shareholder-friendly ETF solution for owning gold.
3) Concerns about BAR's liquidity are dissipating fast as this low-cost ETF provider is accumulating AUM at a rapid clip.
4) The Federal Reserve's recent policy statement was dovish, and this bodes well for gold.
BAR shares are a long-term buy and I recommend a dollar cost averaging strategy.
Disclosure: I am/we are long BAR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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