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Besides the 1980 peak, from 1979 to 2001, the price was as though nothing happened in a 20-year time frame. If Rip Wan Winkle had gone to sleep in 1979 and woken up in 2002, it would have been like nothing had happened to gold prices despite being the favourite asset class of billions of people.
After 2009, there was the global financial crisis and quantitative easing. We knew at that time gold prices would go up, and they did as easy money was being printed. The next spike happened in 2020 with the covid-19 outbreak and another massive round of fiat currency printing.
But let us take a peek into gold prices from 2002 to 2009, which is a fascinating time frame:
1. The US was coming out of the dot-com bubble
2. It was after the recession in the aftermath of 9/11
3. Interest rates were increasing
4. The economy was doing good
5. The housing bubble was forming across the US
Despite the interest rates going up and the economy doing great, gold prices were also going higher.
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So, what was happening here?
The first gold exchange-traded fund (ETF) was launched on the Australian Stock Exchange in 2003.
It was followed by the US launch of Gold ETF (GLD) by State Street Advisors. They both started with modest assets under management (AUM), but by the end of 2005, the GLD ETF had reached almost $5 billion in AUM. By the end of 2006, it reached nearly $10 billion in AUM; by the end of 2007, it reached $16 billion in AUM.
The price of gold doubled to almost $700 by this time. Towards the end of 2008 and the beginning of the financial crisis, the AUM reached $21 billion. By March 2009, when the financial crisis was in full swing, the AUM went to $30 billion, and by September, gold prices were at $1,200.
In 2024, the AUM for GLD by State Street Advisors has hit $60 billion-plus, and the next largest gold ETF, iShares Gold Trust by BlackRock, had $30 billion in assets.
How did the Gold ETF cause this rally in gold prices despite gold being an asset that was available for investment for 3,000 years?
With stocks, there are individual investors and large pension funds, as well as hedge funds, who buy stocks. You never get to possess the physical stock certificate in hand like in the old days, when the exchange would send you share certificates in your name. Nowadays, it’s held with a central custodian like Depository Trust and Clearing Corporation (DTCC) in the US for the New York Stock Exchange.
Large financial institutional investors like hedge funds and pensions are regulated by state and federal legislation on what kind of assets they can buy and who should hold the assets they buy. These regulations are out there to protect the investors’ money.
A portfolio manager with expertise in picking stocks wants to avoid being boggled with custody issues and security risks associated with his investments. As a fund manager, they would rather utilize their time analyzing investments rather than focusing on how to secure the assets procured.
It is prudent for large financial institutions and family offices to have diversified assets in their portfolio. That is the strategy to protect their wealth when one asset class takes a massive hit in the market. Gold is an asset class considered a safe haven during inflationary times. Many funds could not buy physical gold due to the risks associated with custody. They could purchase mutual fund trusts that invested in gold.
ETFs made it possible for pension funds, hedge funds and large family offices to invest in gold and trade it like a stock. Before that, they could only buy mutual funds or trusts that invested in gold or companies involved in mining and refining gold.
Compared to mutual funds, ETFs have huge advantages like:
1. ETFs trade like stocks all day; mutual funds can trade only at closing prices. If the market crashed 8% at the opening, you placed an order, and the market rallied by 10% by the closing time, you would not be able to buy the massive dip
2. ETFs have much lower costs associated with them, and your fees are much lower
3. If the ETFs are trading below the net asset value of the underlying assets you can redeem your ETF via authorized partners and brokers to receive the underlying and sell it at market prices. With mutual funds, you must wait till the price of the mutual fund reaches the net asset value of the underlying asset.
The history of Bitcoin ETFs
The journey towards a Bitcoin ETF in the US has been long and complex, marked by regulatory concerns, legal challenges, and growing investor demand. While futures-based Bitcoin ETFs have been approved and traded successfully from 2021, the spot was only given a green light by 2024. The history of Bitcoin ETFs in America since 2017 is a story of persistence in the face of regulatory challenges.
The Winklevoss twins made the first major attempt to launch a Bitcoin ETF in March 2017, proposing the Winklevoss Bitcoin Trust. The US Securities and Exchange Commission (SEC) rejected their application, citing concerns about market manipulation, lack of regulation in Bitcoin markets, and the potential for fraud.
In July 2018, the SEC rejected the Winklevoss twins’ second attempt and several other Bitcoin ETF proposals, including those from ProShares and Direxion. The primary reasons were consistent: Concerns about market manipulation and insufficient investor protection.
Multiple companies, including VanEck and SolidX, continued to submit Bitcoin ETF proposals. VanEck SolidX Bitcoin Trust was notable for attempting to address the SEC’s concerns by proposing a physically backed ETF, meaning it would hold actual Bitcoin. However, the proposal was postponed several times and eventually withdrawn due to continued regulatory uncertainty.
In October 2021, after years of rejections, the SEC finally approved the first Bitcoin-related ETF, but with a significant caveat: It was a Bitcoin futures-based ETF rather than a physically backed one. This ETF, the ProShares Bitcoin Strategy ETF (BITO), was launched on 19 October 19 2021, marking a historic moment for Bitcoin in traditional financial markets. The ProShares Bitcoin Strategy ETF invests in Bitcoin futures contracts rather than directly in Bitcoin. Futures-based ETFs are generally considered safer from a regulatory perspective because they are based on regulated futures contracts rather than the underlying, less-regulated asset.
The immediate impact was that the ProShares Bitcoin Strategy ETF saw a strong reception, with over $1 billion in AUM in just a few days. It was the second-most heavily traded new ETF on its first day in history.
In 2022, Grayscale launched a lawsuit against the SEC after its application to convert its Bitcoin Trust into a spot Bitcoin ETF was rejected. Grayscale argued that the SEC acted arbitrarily by approving futures-based ETFs but not spot ETFs. The case gained significant attention and highlighted the ongoing struggle between crypto advocates and regulators.
The D.C. Circuit Court of Appeals closed the books on a dispute between the SEC and Grayscale with a final ruling that ordered the agency to scrap its rejection of the asset manager’s spot Bitcoin ETF application in October 2023.
On 10 January 2024, the SEC eventually approved 11 new spot Bitcoin ETFs. A spot Bitcoin ETF is an ETF that tracks Bitcoin’s spot or current price.
Various funds started holding ETFs in bonds, currencies, gold, real estate investment trusts and volatility, but none caused the storm as Bitcoin spot ETFs in 2024.
In six months, the top Bitcoin ETFs had an aggregate AUM of $42 billion, something the Gold ETF achieved in six years. The price rose after the court verdict from $27,000 in October 2023 to $45,000 until the first ETF approval date. From the first ETF trading date of January 2024, it went to $70,000 by March 2024.
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Suppose history is something we can learn from with respect to other ETFs, their AUMs and their correlation to underlying asset prices over a five-year period, then it would not be farfetched to imagine the price of Bitcoin is headed for the moon in the next five years.
Nithin Eapen is a seasoned speaker, technologist and entrepreneur with a deep passion for finance, cryptocurrencies and technology. With a computer science and finance background, Nithin has spent over two decades in the tech and financial industry, working with cutting-edge technologies and innovative startups.
Note: The purpose of this article is only to share an opinion. It is not a recommendation. If you wish to consider an investment, you are strongly advised to consult your adviser. This article is strictly for educational and informational purposes only.