Precious Metals ETFs: Should You Follow Conventional or Contrarian Wisdom?

When central banks in a country or region lower their target interest rates, the respective currencies tend to fall in the near-term. And with the globally coordinated (and non-coordinated) rate cuts happening worldwide, conventional wisdom suggests that all currencies would give way to precious metals.

Indeed, we've seen a fair amount of precious metal buying in the ETF world. Although gold via streetTracks Gold Shares (GLD) is still 20% off its high, it is essentially flat on the year. Similarly, the Powershares DB Precious Metals Fund (DBP) is down a mere 10% YTD.

Broader commodity indexes haven't been quite as lucky. The PowerShares Commodity Index Tracking Fund (DBC) and the Dow Jones AIG Commodity Index ETN (DJP) are down 32% and 39% respectively.

The reason for the commodity bust has some roots in the current pressures of deflation. Some people believe that the unprecedented efforts to increase liquidity and consumer spending around the world will ultimately create hyperinflation in an artificial economic rebound. And if that's the case, DBC and DJP should rise precipitously.

However, when oil and "ag" were setting inflation-adjusted records, gold and silver were 50% below the inflation-adjusted highs of the 1980s. Wasn't that akin to hyperinflation... watching oil vault from $75 to $150 in less than one year? Perhaps precious metals are not the answer to hyperinflation. (Or perhaps other "stuff" is!)

It stands to reason that gold and silver, conventional safe havens for inflationary times, seem to be working their best magic here in deflationary times. That seems strangely contrarian.

Looked at another way, however, the deflationary data that we're receiving today may be a lagging indicator. After all, assuming we get our GDP growth both here and abroad, some inflation would inevitably be around the corner. So it may be that investors are simply purchasing precious metals ahead of what's coming down the gold brick road. (Only this time, the rise in commodities will be happening when faith in fiat currencies is faltering.)

Regardless of the reason for price movement, it is indeed worth noting that the Powershares DB Precious Metals Fund (DBP) is up 8.5% over the last 8 weeks. Equally noteworthy, this fund is 5% above its 50-day moving average.

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Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[NOWHEREMAN:]

Pretty simple really, Downtrend lines have been broken decisively. The measured move for GLD would be in the old previous high area of $1000 plus, breaking out to a possible $1450. How long it takes? Got me. Depends on the Oil Complex which will in turn drive the USD.

If Russia plays along, Joins Opec then 50% of the world's output will be controlled by the new Opec.

While oil production in Russia is not totally controlled by the Government. The Pipe lines which transport oil out of Russia to the rest of the world are 100% State owned.

What the Russian Government wants will be agreed to, voluntarily or involuntarily.

IMO

2008 Dec 17 06:33 AM

[applesauce:]

All the producers accept perhaps Saudia Arabia need cash to keep the masses from rioting. Russia will cheat or creat a " incident" or perhaps Iran will do something to creat an artificial price surge. The OPECers need to pump and sell all they can and in a world with short term deflation due to weak ecomomies demand destruction will continue. These things usually end in war.

2008 Dec 18 01:22 PM

[NOWHEREMAN:]

Russia is already threatening to stop Ukrainian Nat gas supply because of non payment, again.

The last time around when they did, Europe was affected because 80% of their NG flows through these Ukrainian pipelines.

There is a bit of distortion being played in the crude pits. Brent trades around $44 while WTI is around $36. Different contract months are being compared, the $36 WTI expires today, come Monday WTI will jump to everyone's dismay.

2008 Dec 19 03:44 AM

[jse17:]

Another informative and appreciated article.

DBP’s management fee deserves evaluation. Perhaps others will be disappointed that the DBP management team feels their “skill” in monitoring an ETF is appropriately priced at 0.75% (not a typo). If so, one can easily create a DBP profile by purchasing the IShares Gold and Silver index funds e.g., IAU and SLV at a fee of 0.4% and 0.5% respectively.

If we do not protect ourselves, rest assured, Wall Street will not!

2008 Dec 19 09:30 AM