Over the past year, Gold ETFs have played a very important role
in shielding the investors from stock market volatility arising out
of the economic issues from both sides of the Atlantic as well as a
marked slowdown in the emerging market equity space.
However, over the past couple of months, the yellow metal has
been facing downward pressure in price. This has been especially
true in the past few trading sessions where it has been faced a
major sell-off (read Forget US REITs, China Real Estate ETF is
Booming).
The SPDR Gold Trust (GLD) with an asset base of
around $72 billion and an average daily volume of around 9 million
shares is by far the most popular and most liquid Gold ETF
available. Therefore its prices can be used as a good proxy to
denote the prices of spot gold prices. The following chart shows
the six months daily price movement of GLD.
Gold is amidst a very strong short term technical
downtrend as indicated by the chart above. The ETF has been forming
bearish patterns over the past few months.
First, it formed an inverted cup and handle
pattern and after which the ETF has been seen forming a
head and shoulders pattern which is also
characterized by a breakout of the neckline (see
Mining ETFs Surge on Fed Decision).
The $160 level is the immediate support level for the ETF and
should be treaded with caution. This is followed by $155 level
which previously was a support.
A breakout of this level will be characterized by a further
steep decline. GLD is trading below its 50, 100 as
well as 200 DMA line which also signifies a strong downtrend for
the ETF.
However, the ETF is trading at a Relative Strength Index
(RSI) value of 30.61 which implies that it is trending
near the oversold territory (circled portion).
Therefore, it may witness an upward price movement in the following
few trading sessions. However, it will only be a minor technical
adjustment rather than a trend reversal.
Fundamental Factors
It is true that gold was expected to gain the most, after the
announcement of QE3 as the Fed’s latest easy money program was
expected to make Gold the safer safe haven,
especially considering the ultra low yields in the Treasury bond
market (read ETFs in a QE3 World).
Up to a certain extent it did happen. Gold prices soared and so
did the prices of Gold ETFs during mid-September, at least right
after the announcement of the easing. However, the trend was very
short lived as it was soon followed by a strong correction.
Adding to the woes of the yellow metal was a weak consumption
demand from economies like India and China. This is especially
disappointing as the festival season in India has just concluded
and the nation’s demand for gold is counted upon as one of the
major fundamental price drivers.
However, it is not yet time to completely write-off the yellow
metal and its ETF followers. While it is true that gold has been
witnessing a very steep decline in the recent sell-off, it is also
true that the precious metal is on the verge of closing the year on
positive territory just like it has in the past few years and also
on a multi-year high after steadily climbing up for a few
years.
Also, the upcoming domestic as well as global events make it
likely that the yellow metal to bounce back strong in the coming
year. For instance, it we finally do manage to fall off the fiscal
cliff, equities will have a tough time coming up to the lofty
levels it has maintained throughout the year (see Defensive Sector
ETFs for the Fiscal Cliff).
This will be favorable for gold investors since the investment
demand for gold will increase as it is expected to be the new safe
haven. Also, effective next year, the economy will experience an
additional $45 billion of fresh money per month in the bond
markets, setting the magnitude of the total monetary easing per
month at $85 billion.
While this is primarily aimed at reducing unemployment levels to
6.5% until inflation reaches 2.5%, it will also cause the U.S.
dollar to lose value and at the same time bring Treasury rates even
lower (read Currency Hedged ETFs: Top International Picks?). Also,
the full effects of the monetary easing which was announced in
September of 2012 will be witnessed in the coming fiscal. All these
are pretty optimistic circumstances for Gold.
ETF Choices
However, it is still difficult to comment if Gold will reach at
or near its high levels anytime soon this fiscal, especially given
the recent pessimism surrounding the yellow metal. Nevertheless,
investors seeking exposure in the commodity could try the following
ETFs:
SPDR Gold Trust (GLD) charges investors 40
basis points in fees and expenses and is one of the biggest ETFs in
terms of total assets. The ETF tracks the spot price of gold, by
taking exposure in gold bullions as opposed to future
contracts.
The ETF is up by 5.50% year-to-date. It just has a mere 9%
correlation with the S&P 500. GLD has a Zacks Rank of 3 or
‘Hold.’
PowerShares DB Gold ETF (DGL) was launched in
January of 2007 and tracks the DBIQ Optimum Yield Gold Index Excess
Return, which tracks the performance of gold by taking exposure in
gold future contracts.
DGL has an asset base of $512 million and on an average does a
daily volume of 73,000 shares. However, the ETF charges a hefty
expense ratio of 75 basis points which might be a bit too much for
investors.
DGL has a Zacks Rank of 3 or ‘Hold.’ The ETF is
up by 4.19% year-to-date and has an 8.87% correlation with U.S
equities (see Comprehensive Guide to U.S. Junk Bond ETF
Investing).
iShares Gold Trust (IAU) also tracks the spot
price of gold by taking exposure in gold bullion. However, the ETF
has a strategic advantage over other competitors on the expense
front.
It charges just 25 basis points in fees and expenses. It has an
asset base of around $1.50 billion and an average daily volume of
around 5.9 million shares (see more in the Zacks ETF
Center).
The ETF has returned 5.56% year-to-date and has earned a Zacks
Rank of 3 or ‘Hold.’ It has an 8% correlation with U.S
equities.
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PWRSH-DB GOLD (DGL): ETF Research Reports
SPDR-GOLD TRUST (GLD): ETF Research Reports
ISHARS-GOLD TR (IAU): ETF Research Reports
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