The Gold Standard’s Achilles’ Heel: A Problem of Returns, Not Purpose

The recent downturn in gold prices has been a stark reminder that even the most stalwart hedges can falter when market conditions change. Decades ago, investors turned to the SPDR Gold Shares (GLD) as a reliable way to gain exposure to physical gold bullion without having to store it themselves. However, with gold’s price stagnating in recent months, the feeble returns on GLD have become increasingly difficult to justify.

One of the most significant drawbacks of holding GLD is that it doesn’t generate any income during periods of low or no gold price appreciation. With the 10-year Treasury sitting at 4.70% and inflation running hot, cash is competing fiercely with non-yielding assets like gold. Investors pay a 0.40% fee to hold bullion that pays them nothing in return, making it a bad deal.

In contrast, the NEOS Gold High Income ETF (IAUI) offers an alternative approach to gold investing by layering a data-driven call-option strategy on top of its underlying gold exposure. This innovative structure generates a monthly distribution rate of around 12% over the past year. While this may not be sustainable in the long term, it demonstrates that there are ways to gain exposure to gold without sacrificing returns.

The key difference between GLD and IAUI lies in their structural design. GLD is a grantor trust that simply holds physical gold bullion with no dividends, interest, or option premiums. Its total return is tied directly to the movement of gold prices, minus the expense ratio. In contrast, IAUI’s options overlay adds an extra layer of complexity and risk but also generates a steady income stream that can help offset the costs of holding gold.

IAUI may be particularly appealing to investors in its tax implications. Unlike GLD, which treats gains as collectibles and subjects them to potentially higher tax rates, IAUI issues standard 1099 forms, making it easier for account holders to manage their taxes.

While there are risks associated with investing in IAUI, including the increased complexity of its options overlay, investors who are willing to take on this added risk may find the potential rewards worth considering. As gold’s price continues to stagnate, traditional approaches like GLD will need to adapt if they hope to remain relevant.

With inflation still running hot and interest rates on the rise, the case for holding non-yielding assets like gold is becoming increasingly tenuous. Funds like IAUI may become an important part of the investment landscape as investors seek out more attractive alternatives.

The story of GLD and IAUI serves as a reminder that even the most seemingly rock-solid investments can be vulnerable to changing market conditions. By examining the underlying structures and returns on offer, investors can make informed decisions about their gold holdings – and avoid getting caught in a trap of stagnant returns and rising fees.