Time for gold to shine again….soon

Posted on: March 26, 2012 in: Commodities, Inflation with 0 comments



Stocks are rising. US home sales are recovering. The economy is rebounding. Maybe it’s time to hunker down and buy some gold.

Generally, I am not a big fan of the precious metal. A subconscious reaction against my 22 karat Indian roots? Maybe. But, being a rational CFA, I like to think it’s because gold is an inferior investment: no revenue, no growth, no dividends, and no sensible way to value it.

But gold does have its moments. Last June, with gold around US$1,500, I argued in its favor, on expectations of European trouble. That was the right call then and it could be the right call soon. Since breaching US$1,900 last September, gold has drifted lower and is now around US$1,640.

Gold fell for the same reason it rose: Europe. As the continent lurched from one default crisis to another over the past nine months, gold followed suit. The latest lurch came as Greece negotiated to extend and soften the terms of its bonds. On February 29th, when it was clear that Greece would not default for now, gold fell 5.3%.

But looking ahead to mid-summer and beyond, there are growing concerns and a little gold in your portfolio is the best insurance policy as it tends to be relatively uncorrelated to stock returns.

The biggest concern is inflation. Central banks in Europe, the United States, and Japan have kept interest rates low and increased money supply. These “evil” policies were necessary for Europe to avoid defaults and for the United States and Japan to re-start economic growth.

It is too soon to reverse these policies. Growth is still weak and vulnerable to shocks. In fact, the U.S. Federal Reserve has said more “quantitative easing” is possible if the economy starts to wilt in the summer heat.

Europe has no choice but to maintain easy money and its own version of quantitative easing. Its economy is on the verge of falling into recession.

Even emerging markets are relaxing money supply in response to slowing growth. China, suffering a manufacturing slowdown, has allowed banks to increase lending. India and Brazil have done the same and have also cut interest rates recently.

With so much fresh money sloshing about the global economy, inflation could push higher quickly. That is good news for gold: unlike those useful bits of paper we use as a medium of exchange, its limited supply makes it a decent hedge against inflation.

As I mentioned above, there is no sensible way of valuing gold. The “back-to-the-gold-standard” fringe equates the global economy to gold supply and peg it $14,000 an ounce. (What a way to handcuff our monetary policy and drive us headfirst into the next depression!)

Instead, based on some reliable indicators we monitor, gold is nearing buy levels. A dip to the $1,600 level would be a buying opportunity. As for potential growth, $1,900 is a good year end target, though it will likely drift until inflation begins to rise or some other trouble develops.

The best way to invest in gold is through ETFs holding physical bullion. This is easier and cheaper than holding actual gold bars or certificates. It is also best to avoid ETFs that use futures or swaps to gain or magnify exposure, as these come with their own problems.

One ETF is the iShares Gold Trust ETF (IAU/NYSE). Priced at roughly 1/100th of an ounce, it offers the cheapest gold exposure with fees of 0.25%.

Another ETF is the SPDR Gold Trust ETF (GLD/NYSE). With $70 billion in assets, GLD is the biggest gold ETF. Priced at roughly 1/10th the price of an ounce and with the best liquidity, it is better for large trades though its fee is higher at 0.40%.

A recent entrant to the field is the Royal Canadian Mint ETR(receipt) (MNT/TSX in C$ and MNT.U/TSX in US$). Investors like its home currency advantage. They’ve bought $500 million of it since its November launch. But it is relatively illiquid and as a result, trades at a premium of about 3% over its net asset value. By comparison, IAU and GLD trade at almost exactly their NAV.


Chart courtesy of Bloomberg L.P. Click on Chart for Larger Image

archerETF Metrix 23 Mar 2012
Ticker/Exchange IAU / NYSE
Categories Single Commodity
Total Holdings 1
52 Week High 18.63
Recent Price 16.2
52 Week Low 13.79
Avg Daily Volume 6.6 Million shares
Avg Daily Volume ($) $ 106.2 Million
Total ETF Assets $ 9.7 Billion
Allocation to 10 Largest Holdings 100.00%
ETF Annual Fee .25%
ETF Trading Currency USD
ETF FX Exposure USD
Annual Volatility 20.25%
Correlation to S&P TSX Comp. 46.92%
Return to Risk Ratio 0.78
Beta to S&P TSX Comp. 0.69
Price-to-Earnings Ratio N/A
Use of Leverage No
Use of Futures No
6 month Return 2.60%
1 Year Return 16.13%
3 Year Return 20.77%
Dividend Yield (TTM) N/A

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archerETF offers Global Tactical Portfolio Management.

Our outlook is Global: we invest across countries, sectors, commodities and other asset classes to improve returns. Our management is Tactical: we strive to select the right opportunities at the right times in response to changing market conditions to manage and minimize portfolio risk.

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© 2012 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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