Gold ETFs: Time To Buy Or Sell?

Includes: DGZ, GLD, GLL, IAU
by: Wall Street Sector Selector

by John Nyaradi

Gold ETFs took a hard fall on April 12 and retail investors have been slow to return to gold ETFs, the most popular of which is the SPDR Gold Trust (NYSEARCA:GLD). Since GLD bases its share price on a ten percent basis of the spot price for gold, GLD experienced the same swoons gold experienced on April 12 and 15.

Gold and gold ETFs provide retail investors the opportunity to invest in their favorite metal in the same manner as they would purchase stocks. Futures contracts and physical metal are no longer the only vehicles for these investments. Enhanced participation in the precious metals market by retail investors by way of gold ETFs has moved more smoothly than many commentators originally anticipated. GLD investors were able to benefit from the extraordinary advance in the price of gold after having purchased shares in the ETF since 2005, when the spot price was $500 per ounce.

Gold ETF investors are also acutely aware that the yellow metal has not been anywhere near its September 5, 2011 high of $1,921 per ounce. Approximately one year after that high, on September 28 of 2012, the largest gold ETF GLD climbed as high as 1,720 per ounce. Since the recent selloff, volume has been thin. Reports indicate that since the beginning of 2013, GLD had experienced outflows ranging from as low as ten percent to as high as 40 percent.

Hedge fund hotshot John Paulson has been one of the more strident gold bugs – often prognosticating on the yellow metal's continuing advances – during the past five years. As a result of the recent decline in the price of gold, Paulson's hedge fund has reportedly taken a hard hit. The spot price of gold has fallen 13 percent during April and the mining companies in which Paulson invests have seen their share prices drop even further. Some reports have suggested that Paulson's firm has lost approximately half of its assets during the past two years – with the assistance of a good number of fund redemptions. Nevertheless, in the tradition of the die-hard "buy and hold" investor, Paulson is not running scared. He believes that gold will rebound in spite of the $1.5 billion hit to his net worth last week.

So why did gold tumble?

A frequently-cited explanation is the theory that gold and gold ETF prices sank because the central bank of Cyprus will be unloading between €400 million and €500 million of its gold reserves in order to contribute to the bailout of its banks, as required by the bailout terms arranged with the Eurogroup financial ministers.

Another possibility is based on the fact that many people invest in gold as a hedge against inflation. On April 12, the Bureau of Labor Statistics reported that the Producer Price Index for March came in lower than expected. Although economists had been expecting to see wholesale prices decline by 0.2 percent, the report indicated a 0.6 percent drop. Those worried about inflation likely became more concerned about the possibility that like-minded investors in gold would be changing their positions with the latest "all clear" signal.

Since early October of 2012, the price of gold has declined 22 percent, with nearly half of that distance covered on April 15. April 18 brought a return of buyers to the gold market, with June gold futures advancing 0.59 percent and the spot price of gold jumping 1.01 percent at the Chicago Mercantile Exchange, to close at $1,391.40 per ounce.

So is it time to buy or sell?

At the current time, all technical indicators point to a bear market in gold and gold ETFs and so, technical analysis says that right now is not the time to buy gold as the technical picture is very weak. Furthermore, fundamentals don't support higher gold prices as nations and consumers deleverage and we're in a seemingly deflationary period with the possibility of global recession ahead. However, this situation could and probably will change over time, and so gold could likely once again be a "buy" somewhere down the road.

If you are interested in using gold ETFs to invest in gold, here are some of the more popular selections:

For gold bulls:


This gold ETF reflects the current price and trends of Gold Bullion and so offers exposure to the gold market within a brokerage account. The gold spot price for GLD is determined by the 24 hour global over-the-counter (OTC) gold market.

iShares Gold Trust ETF (NYSEARCA:IAU)

This gold ETF is backed by gold held in trusts located in London, Toronto, and New York. The gold spot price for the iShares Gold Trust ETF IAU is set by the London PM Fixed Price for spot gold as determined by the London Bullion Market Association.

For Gold bears:

PowerShares DB Gold Short ETN (NYSEARCA:DGZ)

DGZ is an Exchange Traded Note which is designed to replicate the inverse of the daily performance of the Deutsche Bank Liquid Commodity index – Optimum Yield Gold Excess Return. The index is intended to reflect changes in the market value of certain gold futures contracts and is comprised of a single unfunded gold futures contract.

ProShares UltraShort Gold ETF (NYSEARCA:GLL)

This gold ETF is designed to provide daily investment results (before fees and expenses) that correspond to twice (200%) the inverse (opposite) of the daily performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London.

Bottom line: Gold has held a unique place in financial history both as a store of value and perceived safe haven against inflation and paper currency. It has been in a decade long bull market, but as we saw last week, no bull lasts forever. Nevertheless, the "barbarous relic" and gold ETFs are sure to make new headlines in the days ahead and continue to hold the attention and fascination of investors and speculators around the world.

Disclosure: Wall Street Sector Selector actively trades a wide range of exchange traded funds and positions can change at any time.

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