Gold is Down 23% from the Peak to $4,330 an Ounce. Time to Buy This Top Gold ETF?

Gold's spot price peaked at $5,589 per troy ounce on Jan. 28, doubling from its price of $2,742 per ounce a year earlier. That rally was driven by the Fed's six consecutive rate cuts in 2024 and 2025, which softened the U.S. dollar and strengthened precious metals, as well as by macro headwinds that drove investors to accumulate more gold as a safe-haven asset.

But since then, gold's price has pulled back about 23% to $4,330. Should you capitalize on that pullback and invest in SPDR Gold Trust (NYSEMKT: GLD), the world's largest gold ETF?

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Why did gold's price decline?

Investors often buy gold as a hedge against the Fed's expansionary monetary policies that weaken the U.S. dollar. Since gold, silver, and other precious metals are priced in U.S. dollars, they become more valuable as the U.S. dollar weakens. Geopolitical conflicts, fears of a market crash, and other economic uncertainties also tend to drive its price higher.

At the start of the year, many investors expected the Fed to keep cutting rates. But the Fed kept those rates unchanged in the first half of the year, and the ongoing Iran war -- which drove up oil prices and exacerbated inflation -- is sparking fears of rate hikes in the second half.

If the Fed raises interest rates again, the dollar will likely strengthen, which will reduce gold's price. Higher rates will also drive conservative investors toward higher-yielding, lower-risk fixed-income investments such as CDs, T-bills, and investment-grade corporate bonds.

Is it the right time to buy GLD?

Gold's pullback wasn't surprising, since it tends to go through boom-and-bust cycles. But over the past 20 years, gold's price has risen 613%, outpacing the S&P 500's 482% gain.

So if you expect gold to continue rising as expansionary monetary policies and fiscal deficits devalue fiat currencies, it might seem like a smart time to invest in the SPDR Gold Trust.

With $141.2 billion in assets under management, GLD offers greater liquidity, tighter bid-ask spreads, and a deeper options market than any other gold ETF. But it's also one of the most expensive gold ETFs with a gross expense ratio of 0.40%. That's why GLD's price only rose 547% over the past 20 years and underperformed physical gold by 66 percentage points.

While gold is still a solid long-term investment, I think it's smarter to buy physical gold rather than GLD. If you don't want to hold gold bars, then you should at least consider investing in smaller gold ETFs -- like iShares Gold Trust (NYSEMKT: IAU) and GraniteShares Gold Trust (NYSEMKT: BAR) -- which charge lower sponsor fees of 0.25% and 0.17%, respectively.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.