Are Gold Funds a Buy Again?

By Jim Wiandt

The rising market is not convincing, as I cast an eye on gold once more.

Call it a quirk or call it smart or call it crazy ... and it's been called all of the above, but I and many others love gold. I've never been able to quite get it off of my mind or out of my portfolio. And right now, with equity markets rising, and with gold now at around $870 an ounce and me being nowhere near convinced about a forthcoming bull market, I'm looking at gold again.

Not that you should listen to me, or anyone else who's entertaining the idea of trying to time this—or any market. (Exhibit A is my ill-advised November 2008 buy of XLF, the Select Sector SPDRs Financials ETF). The market could easily be back on track and headed to 15,000. But I'd say that consensus still has this as a bit of a false bull run, with us circling back around at some point to test the lows.

So given that everything else in my financial life lines up nicely with an equity bull market, the gold hedge doesn't seem like such a bad call, particularly vis-à-vis the dollar, which may be looking more and more like the Zimbabwean dollar the way Obama, Geithner and the good-times spending crew are going to have us printing money. That Zimbabwean dollar, by the way, is trading at $4.5 billion to a U.S. dollar. And that's the buffed-up official rate.

You've got some different options on gold—there's the behemoth ($31 billion plus) SPDRs Gold Trust (NYSE: GLD) and iShares Gold Comex Gold Trust (NYSE: IAU), which has about $1.8 billion. If you like the share-play angle (the one I'd always used exclusively until the bullion funds became an option), you've got Van Eck's Market Vectors Gold Miners ETF (NYSE: GDX) on the ETF side, with $2.38 billion in assets of its own. Ironically, the reason people like GDX is that it sometimes shows more volatility than the price of bullion itself (which may feel counterintuitive with the way gold-mining companies hedge the price of gold. But that's the stock market for you, I guess).

To give you an idea, GLD is currently trading at $85.27 a share (more or less on par with 1/10-of-an-ounce of gold, minus the tiny amount of gold that has been sold off over the years to pay the 40 bps fee). It has a 52-week range of $68.81 to $98.99. GDX, on the other hand, is currently trading at $33.20 and has a 52-week range of $15.85 to $51.84. So at a glance, if you want more of a boomerang effect, consider going GDX. If you want the shiny yellow stuff with your name on it in a vault, consider going for the gold bullion ETFs. Wait a bit and there will be at least one other U.S.-listed option as well, from London-based ETF Securities.

We'll Miss You, Greg Newton

The small world of ETF punditry has suffered a mighty blow with the passing of Greg Newton (of a heart attack last week). The ebullient Aussie was all piss and vinegar, and his blogs were as witty and insightful as they were irreverent. Naked Shorts is still up and as biting and funny as ever for those of you who wish to take a gander and spend some time remembering Greg.

We were close with him here at IndexUniverse.com, where Greg was an occasional contributor and always kept things interesting for us. Back in his days at MARHedge, he brokered the deal that had us purchase the ETFR publication. He seemed happier, and a little wilder when he went off to do Naked Shorts—which was just as he wanted it.

We'll miss you Greg. I'm sure you're already stirring up some trouble wherever you are.

Comments

[GMiki1:]

Buy and hold some physical. Deflation or inflation, that doesn't matter. The depression of the 1930s was deflationary and Homestake, a gold stock, rose by a crazy amount. Gold rose--but was controlled by the government. Buy some shares. I do hold GLD and SLV as cash substitutes. With inflation, which I do think we'll have, gold is a good bet as well. Ultimately some gold shares will provide good returns. The right juniors might provide great returns.

Apr 07 10:51 AM

[Conan the B...:]

Gmiki: the depression of the 1930's was deflationary and Homestake's rose by a crazy amount. That's true.

The USA was on the Gold Standard and the Government decided to devalue its currency by raising the USD conversion rate from $20.67 to $35. Gold rose because the government changed the exchange rate. It did Not rise slowly, it jumped overnight and stayed there.

That's all it was, no safe haven, no jump in inflation just a Fiat Change. The change held firm for another almost 40 years. It won't happpen again.

I hold physical Gold and silver and some Juniors. Gold does not rise in a deflationary environment, it didn't then and won't do so now.

Gold and the USD rose because of Risk Aversion.

As risk taking goes up again, both will drop until the prospects for Inflation reemerge. At which point I expect them to decouple.

Apr 07 11:47 AM

[ChasVoice:]

gold and silver bullion ETFs are a fraud.

Apr 07 12:09 PM

[MarvinMBA:]

Actually there is nothing wrong with owning the real thing...put some in the vault.

Apr 07 12:14 PM

[mr freddo:]

I am a believer in gold over the next year or 3, primarily because of the inflation that is bound to come once a recovery gets underway. I am holding GLD, SLV, and GDX as alternatives to cash.

I don't see a huge rally in gold any time soon however. The jewelry market has fallen off with the down turn and the financial apocalypse buying will taper off and reverse to selling once investors are convinced that there is, in fact, a future for the world economy.

Inflation will drive the gold market to spectacular new highs but that could be a year down the road. But when we start to see a recovery, inflation will start to roar and then gold will be a great way to retain value.

Until then, it will trade in a range as it is right now.

Apr 07 12:19 PM

[DONE_SONZ:]

Fiat currencies continue to be devalued even more as more paper money is printed with no backing of gold.The worse the world economies get,the more paper will be printed and the more debt to be piled up.Stagflation and megainflation if you want to call it will follow.Hold your gold.

Apr 07 02:32 PM

[12345:]

"you've got Van Eck's Market Vectors Gold Miners ETF (NYSE: GDX) on the ETF side, with $2.38 billion in assets of its own. Ironically, the reason people like GDX is that it sometimes shows more volatility than the price of bullion itself (which may feel counterintuitive with the way gold-mining companies hedge the price of gold. But that's the stock market for you, I guess)."


The Miners in GDX are not hedged

Apr 07 04:36 PM

[12345:]

If China, Russia, SE Asia, India, and the Gulf states have their way(which they will) the future World Economy will contain Gold


On Apr 07 12:19 PM mr freddo wrote:

> buying will taper off and reverse to selling once investors are convinced
> that there is, in fact, a future for the world economy.
>

Apr 07 04:41 PM

[Roger Knights:]

I think gold could jump by $100 from its low of 870 over the next month. That may seem crazy, but its recent drop also seems crazy (SDRs will Employ QE--that's reassuring?!?), so they cancel out.

I'm also expecting the Dow to drop by 1000 points from its high of 8000 over the next month, for the same reason: because the economic situation, which is what ultimately backs currencies, looks very risky.

Apr 08 01:44 AM

[casinospt:]

Gold happens to have two significant things going for it as a store of wealth -- it's more universally recognized than any other currency and thus is liquid even in places where modern financial institutions are dodgy, it's just about rare enough and valuable enough that most anyone's total wealth could be stored in a reasonably convenient amount. So far, nobody has figured out a cost-effective way of making it out of cheap materials. Gold is valuable mostly because it's hard to get. As mining technology improves, ore grades decline, We've gone from ounces per ton to grams per ton as typical ore grades over the past century. Every mine has a relatively fixed cost of mining. If the price drops below the cost of mining, mining stops, which puts a floor under gold prices.

In times when modern institutions are failing, it's neither surprising nor illogical that people would turn to what has been historically proven. Gold has always been worth something. A case can be made that it's overpriced today by historical standards but that's no more meaningful than when the "silver bugs" say gold "should" trade at 20:1 relative to silver.

Historically, gold has been a lousy investment. The commissions are high and the dividends are non-existent. But in an age when people are more concerned about holding onto what wealth they still have, rather than trying to grow their investments, gold's record as a store of wealth is hard to beat. Throw in suspicion of the government, be it suspicion of government-induced hyperinflation or of government confiscation of traceable accounts, and the high premium currently being charged on physical gold just looks like an insurance policy.

Apr 08 05:44 AM

[AndrewBaker:]

Gold bullion, gold ETF or gold stocks (NYSE: GDX is good) are all worth holding right now with the gold price having dropped to present levels. As a trader I move in and out on the dips and rises, and buying in at this low level should mean a profit when the next push north comes to a (brief?) halt.

Apr 08 12:22 PM

[searcher:]

Gold, Silver, platinum, & precious whatnots...etc. You're all missing the true hyperinflation play. You need to remember one word only - wheelbarrows.

Apr 08 12:26 PM

[Pink Panther:]

Marc Faber recently said that if he had to go to jail for the next 10 years and have no access to trading, he would buy gold and keep it in a safe!

Apr 08 01:36 PM