Gold loves trouble

Posted on: June 20, 2011 in: Commodities, Economic Growth, Precious Metals with 0 comments

SPDR Gold Trust ( Ticker: GLD )


In 2001 the price of gold hit bottom. In the ten years since then, it has more than quintupled. Where does it go from here? Economic uncertainty in both the United States and Europe over the next several weeks should prove positive for gold prices.

Contrary to what gold bugs would have you believe, gold does also go down. Gold prices last went vertical in the late 1970’s, hitting a peak of about US$680 per ounce in January 1980. If you had bought then, you would have spent the next 20 years in regret, as gold prices fell 60%. They hit bottom in mid-2001 at about US$270. Gold is now in the $1,500 range, an increase of 465%.

A good portion of that gain came from a weaker US dollar. Whereas the US$ bought C$1.52 in 2001, today it buys just C$0.98. The ratio is similar for the US$ to Euro rate. As for gold, in C$ and Euro terms, it has risen about 250% over the last ten years, still amazing but much lower than the return for American investors.

Rising demand from investors has also pushed up prices. Total demand – investors plus consumers – for gold has remained steady since 2001, growing only 6.5% to 3,971 tonnes according to the World Gold Council. However, the composition of the demand has changed. In 2001, consumers – jewelers and industry – used nine bars for every bar held as an investment. Today, consumers use just six bars for every four held by investors. In other words, prices rose and consumers cut back their use. (Incredible how that works.) Investors, meanwhile, seeing rising prices, joined the fray on expectations prices would keep rising. 

In the short-term, they may be right for two reasons: tepid economic growth in the US and the Euro-zone’s Greek comedy. Complicating matters is the interaction of these two factors.

The US economy is stubbornly refusing to respond to resuscitation efforts by both the government and the Federal Reserve. The latest economic numbers show slow growth in both jobs and manufacturing output. So slow that we will likely see revival efforts continue. Some suggest a payroll tax holiday, to give workers more money and employers more incentive to hire. There is talk that the Federal Reserve will continue its monetary stimulus past the June 30th end-date. That would be QE III. As for interest rate increases, they are on hold for the rest of this year. Any one of these actions would weaken the US$ and that would see gold prices (and other US$-denominated commodities such as oil) rise.

In Greece, the parliament is arguing about further austerity measures – cutting public sector wages and jobs, collecting taxes, that sort of thing. It has until month-end to take action if it wants to receive funding from the International Monetary Fund and the European Union – funding it needs to avoid defaulting on its loans. A default would hurt the credit ratings of all the lesser Euro-zone countries – Spain, Portugal, Ireland, and Italy – and could be the beginning of the end of the Euro currency. This lends further support for gold prices.

A Greek default would also see the US$ strengthen as investors flee the Euro currency. A stronger US$ would be negative for gold prices, but, based on past performance, gold’s price rise could more than offset the rise in the dollar. By how much, however, is unclear.

There are several gold bullion ETFs to choose from. The biggest is the SPDR Gold Shares (GLD-NY) with about $60 billion in assets. A cheaper alternative is the iShares Gold Trust (IAU-NY). It has about $6.5 billion in assets but its MER, at 0.25% is less than GLD’s 0.40%. Canadian investors looking to avoid US$ exposure could choose Claymore’s US$-Hedged Gold ETF (CGL-TO). Keep in mind that it is not as liquid as the others, has about $500 million in assets and charges about 0.54%.



archerETF Metrix GLD
Category Precious Metal
Benchmark Gold Bullion
Total Holdings Gold Bullion
52 Week High $152.37
Recent Price $149.12
52 Week Low $113.51
Avg Daily Volume 15.23 Million Shrs
Avg Daily Volume ($) $2.27 Billion
Total Market Cap $60.68 Billion
ETF Annual Fee 0.40%
ETF Trading Currency USD
ETF FX Exposure USD
Annual Volatility 21.9%
Correlation to S&P 500 6.1%
Return to Risk Ratio 6.87
Use of Leverage 0
Use of Futures 0
6 month Return 7.20%
1 Year Return 23.93%
2 Year Return 62.21%
3 Year Return 71.38%
Dividend Yield (TTM) 0.00%

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© 2011 archerETF Portfolio Management is a division of Bellwether Investment Management, a discretionary portfolio manager registered with the Ontario Securities Commission. This report is provided for information only and does not constitute investment advice. While we believe the information to be accurate and timely, we make no claim or warranty to that effect. Please seek professional advice before making any investment decision. We may hold positions in any or all securities discussed in this report.

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