Friday March 18, 2011
by Mark Salzinger, editor The Investor's ETF Report
The ETFS Physical Precious Metals Basket (GLTR) is the first physical-bullion ETF to own more than one metal. GLTR’s all-in-one convenience and relatively low expense ratio make it an attractive option.
We like this ETF for investors who want to complement exposure to gold bullion with extensive exposure to silver and modest exposures to platinum and palladium.
Both gold and silver have particular sensitivity to the strength of the global market for automobiles thanks to use in catalytic converters.
Each share of GLTR represents ownership of 0.03 ounces of gold, 1.1 ounces of silver, 0.004 ounces of platinum and 0.006 ounces of palladium.
Based on recent spot prices, these weightings in proportion to one another give gold nearly half the value of each share (about 47%). Silver gets about 40%, with platinum taking 8% to palladium’s 5%.
These proportions are certain to shift as precious-metal prices change over time. In fact, they’ve already moved somewhat since GLTR’s November 2010 inception, reflecting the appreciation of silver (which initially accounted for only about 36% of the portfolio) relative to gold (which initially was right at 50%).
Because of its heavy weighting, gold’s performance will dominate GLTR’s returns. That outsized position makes sense, though, because the market for gold is so much more liquid and deeper than the other precious metals.
However, GLTR’s heavy weighting of gold will make it vulnerable to any decline in the gold price even if the other metals maintain their strong price trends—which could happen if the global economy enters a prolonged period of stable, strong economic growth.
If economic growth persists, industrial demand for silver, platinum and palladium is likely to remain strong while gold’s appeal as a “safe haven” against economic uncertainty is diminished.
Of course, the relative shift in market prices will portend a shift in weightings, so gold’s decline would be mitigated to a degree by increases in the prices of the other components.
On a relative basis, though, both gold and platinum now appear undervalued. iShares Silver has gained nearly 65% since it began to rally anew in late August.
Over that time, the gold/silver ratio (how many ounces of silver can be bought with one ounce of gold) has contracted beyond the levels of March 2008, just before Bear Stearns’ bankruptcy first jolted markets toward collapse.
The ratio, recently 43, also is below its long-term average of 45 and 50, suggesting that silver’s recent price strength has limited its potential for further appreciation (relative to gold).
Both the platinum/silver ratio (at a three-year low) and the platinum/gold ratio (which strengthened steadily from its 2008 nadir but has recently weakened) indicate that platinum also could be poised for relative outperformance, especially as global automobile production continues to increase.
The single largest use for platinum and palladium is in catalytic converters (platinum for diesel-powered engines, and palladium for gasoline-powered ones, although this metal also has been making inroads in diesel).
Automobile production throughout the world is expected to increase in 2011, boosted further as Chinese and Indian producers ramp up output.
Recent performance reflects the gains of silver and palladium relative to gold and platinum. Since GLTR’s late October 2010 inception, it has gained 20.8%.
GLTR may be useful as an inflation hedge. Supplies of platinum and palladium are relatively thin, so higher industrial demand can significantly increase their prices.
In recent years, the gold price has been driven largely by investor sentiment about global economic and social conditions. However, in the late 1970s, the metal rallied as a hedge against high inflation partially caused by excess monetary growth.
GLTR levies a 0.60% expense ratio, which is not at all unreasonable considering its convenience.
Learn more about this financial newsletter at Mark Salzinger's The Investor's ETF Report.