8 Reasons ETF Investors Go for the Gold

People have been holding gold for ages. Why, after centuries, do exchange traded fund investors still find gold attractive today?

Gold is a valuable component of an investment portfolio, writes Tony Daltorio for Investopedia. It has been shown that gold has held its value over the long term. The precious metal has hedged against inflation and devaluations of major currencies. Daltorio provides these attributes that make gold a prudent investment:

1. Value. Gold has held its value over the years and people still use gold as a way to preserve wealth for their progeny.
2. U.S. dollar. As the dollar devalues, investors put their wealth into gold, which typically results in higher prices for gold. The weakening dollar can be attributed to large budgets, trade deficits and an increase in the money supply.
3. Inflation. We have all heard of gold’s ability to hedge against inflation. In times of U.S. inflation, the average real return of gold was considerably higher than the stock markets.
4. Deflation. There has been a slowing business activity, a drop in prices and excessive debt not seen since the Great Depression. It was also during this deflationary period that the relative purchasing power of gold climbed.
5. Global Uncertainty. Gold, or the “crisis commodity,” has been bought up after a rise in world tensions. This doomsday outlook provides a rise in gold prices resulting from low confidence in a government.
6. Supply. The selling of gold bullion from global central banks have slowed and production of new gold from mines have also been diminishing. A basic economic rule of supply and demand would show that reduced supply should result in increased prices.
7. Demand. Emerging market countries have also been buying up gold. Such areas include India, one of the largest gold-consuming nations in the world, and in China. A growing interest in commodities as an investment class has also been driving up demand for investors.
8. Portfolios. To diversify a portfolio, an investor would find investments that are not closely correlated to one another. Gold tends to have a negative correlation to stocks and other financial investment tools. A combination of gold with stocks and bonds may balance volatility and risk.

SPDR Gold Shares (GLD): up 0.1% year-to-date

PowerShares DB Gold (DGL): down 0.3% year-to-date

Disclosure: some of Tom Lydon’s clients own shares of GLD.

Max Chen contributed to this article.

Comments

[Jolly_Rancher:]

I can think of an even better investment than gold and housing: it's called investing in yourself. Hard work, education, training, developing a business, putting your money and your talents to work. And this actually contributes value to the world around you, building things, hiring people. Stuff gold and housing; go start a business and do something productive.


On Apr 10 12:04 AM bcncv wrote:

> I can think of another asset that holds its value over the long term.
> It rises in value with inflation, but unlike gold, it actually serves
> a useful purpose.
>
> That asset is housing. Home values have tracked and increased along
> with inflation as long as there has been a price put on them. In
> addition, being a levered investment, it provides much better protection
> from inflation.
>
> Just don't forget, like gold, it is subject to occasional massive
> price corrections. I'm not saying gold is a bad investment. Just
> realize it holds the same downside risks as any other asset before
> you buy it.

Apr 10 01:23 PM

[Paul H. M.:]

I agree that gold will go up.

The question is: will it go up much from the current bubble it is in compared to more undervalued commodities?

And is inflation already being priced in to gold (since everybody agrees it will happen)?


I have some bullish GLD spreads (where my downside is protected), but investing in gold straight up could cost you dearly (as buying anything during the peak of a bubble usually leads to losses).


On Apr 09 02:58 PM ibejack wrote:

> The Anti-gold crowd hates the fact that they cannot get rid of gold.
> It has performed beautifully during this most recent crisis. Go
> ahead and continue to try and convince yourself that gold is irrelevent
> while the price of gold continues to say the opposite. Fiat currencies
> come and go, there is but one constant providing a store of value
> over thousands of years.
>
> Ask the world's most wealthiest families how they have perserved
> their family wealth and power through the generations. Ask the banks
> of the world why the hold almost 15% of the worlds gold reserves
> if it's so irrelevent. The truth is, gold is not back because it
> never went anywhere. It was a store of value 1000 years ago, today,
> and it will continue for the next 1000 years.

Apr 10 02:09 PM

[Paul H. M.:]

Gold is worthless without experts to judge the quality. If society breaks down, will people want gold or ammo?

Which one will they pay more for?

The point: gold's value relies on economic recovery just as much as any other investment.


On Apr 10 01:19 PM Jolly_Rancher wrote:

> Yes but how much will your GLD shares be worth when the all the fiat
> currencies are worthless and governments are brought to their knees?
>

Apr 10 02:12 PM

[somecatchyp...:]

It's all over the net that record amounts are flowing into precious metal ETFs. Physical bullion and coins are said to be selling at huge premiums and hard to come by.

If these rumours are true, why are prices not moving steadily higher?

Apr 10 02:48 PM

[Conan the B...:]

Go ahead, buy those GLD shares...

What are you going to get when you sell? That worthless currency, can you sell an oddlot? I don't know, doubtful.

Physical bullion or scrap? At least with scrap, I know it will appreciate as much, but I don't have to sell an oz. to get just what is needed.

And, currently I can get really great deals for these worthless dollars. Instead of a markup of 150%, markups of less than 20% can be had. (starting with 40 to 60% off, adding senior discount, Day discount, Bonus coupons, getting a store card etc)

Obama wouldn't dare confiscate SnoopDogs chains.

Apr 10 03:04 PM

[lark:]

www.dailypaul.com/node...
Gold is money

Apr 10 06:12 PM

[guitoon:]

gold ?? why not platinium..never understood why people love that..stone age..no value..shiny that is it
big gold bubble right now even if i am bearish
people should stick with petrol....that is value for the time being
in 50 years might be something else

Apr 10 07:53 PM

[datadave:]

my first investment was GLD. Worst investment choice I hopefully will ever make.

Apr 10 09:50 PM

[Whippet:]

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."

Ironically enough, that was written by Alan Greenspan before the banksters gave him a full frontal lobotomy.

Physical gold is the simplest non-paper insurance policy against hyperinflation. For those of you who say it's not money- you had better invest in lead instead- you're going to need it.

Apr 10 11:00 PM

[gooter:]

gold isn't money? EVERYTHING is money, marbles, toothpicks, rocks, and on and on. If it can be traded, it's worth will be determined by another party. You can accept the trade or not. What you pay and what you accept in trade is up to you. If you don't like the medium being used, you don't make the trade........DUH!!

Apr 11 07:50 AM

[bricki:]

You do not need to be an expert to assay gold. In fact one of the big reasons that gold was adopted as means of exchange was that it was very easy to determine the purity of a sample by use of a touchstone or by measuring the density by water displacement and weight (see Archimedes).

On Apr 10 02:12 PM Paul H. M. wrote:

> Gold is worthless without experts to judge the quality. If society
> breaks down, will people want gold or ammo?
>
> Which one will they pay more for?
>
> The point: gold's value relies on economic recovery just as much
> as any other investment.

Apr 11 10:19 AM

[bricki:]

I agree that deficit spending is an alternative way to confiscate wealth. My thesis is that the aggregate level of taxation is exactly equal to what government spends, NOT what it collects by direct taxation. This is the fallacy of supply siders - by cutting direct taxation but not cutting spending they are NOT lowering the effective tax rate. No wonder tax revenues don't increase accordingly - they aren't actually decreasing the overall tax rate, only the direct tax rate which is of course what they trumpet at election time.

Now the real question that comes is how this deficit will be paid for. One way is to shrink it via monetization. The way to hedge against that is to buy real assets of which gold is a good one. But this doesn't cover the other hidden deficit spending is financed. So while avoiding keeping wealth in fiat currency is a good step, it is not a complete protection against deficit spending.

Whether or not

On Apr 10 11:00 PM Whippet wrote:

> "In the absence of the gold standard, there is no way to protect
> savings from confiscation through inflation. There is no safe store
> of value. If there were, the government would have to make its holding
> illegal, as was done in the case of gold. If everyone decided, for
> example, to convert all his bank deposits to silver or copper or
> any other good, and thereafter declined to accept checks as payment
> for goods, bank deposits would lose their purchasing power and government-created
> bank credit would be worthless as a claim on goods. The financial
> policy of the welfare state requires that there be no way for the
> owners of wealth to protect themselves.
>
> This is the shabby secret of the welfare statists' tirades against
> gold. Deficit spending is simply a scheme for the confiscation of
> wealth. Gold stands in the way of this insidious process. It stands
> as a protector of property rights. If one grasps this, one has no
> difficulty in understanding the statists' antagonism toward the gold
> standard."
>
> Ironically enough, that was written by Alan Greenspan before the
> banksters gave him a full frontal lobotomy.
>
> Physical gold is the simplest non-paper insurance policy against
> hyperinflation. For those of you who say it's not money- you had
> better invest in lead instead- you're going to need it.

Apr 11 10:34 AM

[Conan the B...:]

Inflation starts rising, Volcker replaces Bernanke.

What are you going to do then?

Apr 11 12:48 PM

[svosavvy:]

Cheap fuel and nothing else to do, dig dig dig. Mail in your scrap and the creepy guy will pay you, "now that's alotta gas money" We will be witness to the oversupply of the century hurry and buy gold now before it becomes worthless. It is so rare that nearly every american owns some. The market will almost certainly screw this up and outstrip demand. Yet for all the gold circulating it will almost certainly lack the liquidity to drive a world economy of scale, know any good assayers. We may not have a gold standard anymore but it is still pegged in dollars. I can't wait for the next comstock lode to roll in this modern day gold rush.

Apr 11 11:46 PM

[chux08:]

All of history's alchemists and all the other government magicians since time began have never been able to "make" gold and that's the real reason for it's....value, perceived or not. It is what it is and that it has been used and seen as money and a store of wealth for millions of people over the span of thousands of years is without argument. And all with or without any government's approval. I have a hard time contemplating any economic reality if the barbarous relic didn't exist.
And finally, I'd bet almost anything that the anti-gold crowd also hated history, along with Austrian, free market economics if they were even exposed to it in school. No wonder there's such ignorance about gold in our country. It was planned that way....

Apr 12 04:09 AM

[Maxe Paul:]

I have been selling gold for a year now, and i am making money, so it makes me ponder your statement that gold has "performed beautifully during this crisis", sure has, down from over $1020 to $880.

I dont hate the fact i cannot get rid of gold, i get rid of it by selling it. I dont see any reason why you would own an asset going down when you can buy stocks that rally 50 to 100% in a few weeks.


On Apr 09 02:58 PM ibejack wrote:

> The Anti-gold crowd hates the fact that they cannot get rid of gold.
> It has performed beautifully during this most recent crisis. Go ahead
> and continue to try and convince yourself that gold is irrelevent
> while the price of gold continues to say the opposite. Fiat currencies
> come and go, there is but one constant providing a store of value
> over thousands of years.
>
> Ask the world's most wealthiest families how they have perserved
> their family wealth and power through the generations. Ask the banks
> of the world why the hold almost 15% of the worlds gold reserves
> if it's so irrelevent. The truth is, gold is not back because it
> never went anywhere. It was a store of value 1000 years ago, today,
> and it will continue for the next 1000 years.

Apr 12 09:11 AM

[yuman:]

Mr. Lydon,
You said "Inflation. We have all heard of gold’s ability to hedge against inflation." without presenting any proof. Can you show, for example, gold price vs. CPI and SPX? Without such basic data support, the assertions appear crap.

Apr 12 01:40 PM

[psig:]

Maybe we already have some fiat gold. When there is so much gold being traded on paper who's to say whats there. Remember all those federal regulators that kept an eye on Bernie "made off with your money" Madoff. I hope they are not the same ones keeping track of fund stored gold.


On Apr 09 09:53 PM jambo wrote:

> Agreed jack, with the exception that; with all the ETF action we
> might well see fiat gold. Sooo, what of platinum? has a nice ring
> to it, no?

Apr 12 08:53 PM

[silver-bug:]

Gold is great, but silver is better. For those who say gold "is not money", they say that because they are used to the paper currency (and digital currency) that has replaced gold as "official currency". Governments hate gold because gold uncovers inconvenient truths about deficit spending and wasteful mismanagement of funds. Paper currency can be printed as long as there is cotton, ink, and printing presses (and now, as long as there are computers). Gold is not so easy to create, since it has to be dug out of the ground, refined, and minted.

Apr 13 03:11 PM

[Tom Lydon:]

Here are more reasons why Gold remains attractive, even though prices have dropped.

www.etftrends.com/2009...

Jul 21 05:25 PM