Gold ETFs Could Glitter In September

The eighth month of the year is living up to its reputation for being tricky for stocks. Barring some significant action, the S&P 500 will likely close August with the first negative performance on a monthly basis this year for the benchmark U.S. equity index.

Perhaps not surprisingly, gold exchange traded funds are faring well against the backdrop of modest equity weakness. Month-to-date, the SPDR Gold Shares GLD and the iShares Gold Trust IAU are up 3 percent apiece. More gains could be in store for gold and bullion ETFs in September, a historically glum month for the S&P 500.

“Looking forward to September, the level of uncertainty is expected to intensify amid uncertain policy direction, a volatile Trump administration, the looming debt ceiling and budget debate, in addition to the concerns that drove August” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Wednesday. “Historically, September is the worst-performing month of the year with the S&P 500 declining 0.7% on average. As such, we decided investigate the prospect of gold as a defensive hedge in the near term.”

A Shiny September

Dollar weakness is proving efficacious for gold this year. The U.S. Dollar Index is down 9.5 percent year-to-date, underscoring the greenback's status as one of the worst-performing currencies in the world. Gold, like other commodities, is denominated in dollars, meaning a weak dollar can equal strength for commodities.

“There are several outside factors that impact the direction of gold, which has been in an uptrend since early July,” said Rosenbluth. “The direction of the dollar has the most significant correlation with gold prices. Inflation and interest rates also have an impact. The US Dollar Index is about 9% lower than where it began the year, while gold has appreciated by 13 percent over the same time period. Gold has a negative correlation of 48 with the dollar, explaining the opposite moves.”

The current quarter is usually kind to gold while the fourth quarter can be a selling opportunity with the yellow metal.

“Seasonally speaking, the third quarter is a period of strong performance for the commodity,” notes Rosenbluth. “Since 1978, gold's average price change was the highest during the July through September period, rising 4.3 percent on average 60 percent of the time. The fourth quarter has historically had the worst performance, rising only 29 basis points, with a frequency of advance pegged at only 44%. Therefore, if history is any guide, we are in the midst of the best three months of the year for gold.”

Pick And Choose

GLD is the world's largest gold-backed ETF and the most heavily traded. The ETF has about $33 billion in assets under management, more than triple the $9.3 billion found in IAU. However, IAU is the less expensive fund with an annual fee of 0.25 percent, or $25 on a $10,000 investment, compared to 0.4 percent on GLD.

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Disclosure: The author owns shares of IAU.