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ETF Specialist

Investors Are Once Again Rushing Into SPDR Gold Fund

But this gold-backed ETP doesn't shine quite as brightly as its lower-priced rival.

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Gold is traditionally sought after as a store of value in times of severe economic dislocation, an insurance policy against financial Armageddon. Its historically low to negative correlations with most broad asset classes indicate that gold might be a worthwhile investment for a small portion of an investor's portfolio. While gold has exhibited a low level of volatility relative to equities over the past quarter century, the massive price swings experienced from the early 1970s through the mid-1980s--as well as its sharp sell-off in 2013--demonstrate the effects fickle investor sentiment can have on the price of the yellow metal. This type of volatility also underscores why an allocation to gold should probably only occupy a small portion of a well-diversified portfolio. As for an investment in physical gold through an exchange-traded product (ETP), gold ETPs are the least costly, most broadly accessible, and most liquid vehicles for acting upon one's gilded aspirations.

Fundamental View
Gold has no intrinsic value. The yellow metal does not produce cash flows that it can share with investors, like equities. Nor does it throw off coupon payments, as a bond does. Financial theory states that a security's intrinsic worth is equal to the present value of the future cash flows it will generate. With no cash flows to project and discount back to today, gold is a purely speculative instrument: It is only worth what someone else is willing to pay for it.

Ben Johnson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.