Are Gold ETFs Trapped in a Bubble?

Gold and its related ETFs are once again surging in popularity, which leads to the inevitable question: Is this a bubble?

Gold is extremely popular right now as an investment, thanks to its inherent haven-like qualities and its ability to move opposite from the general market. The interest in gold has been firmly established based on recent market activity, but will this create a bubble that could burst and leave investors soaked?

While gold can be a great bet for investors looking to create a safety net and hedge against inflation in their portfolios, Brett Arends for The Wall Street Journal reports that there are several reasons investors should be cautious when considering a gold investment:

Nobody really knows what the metal is worth. It does not generate income nor any gains come from capital appreciation.

Investor inflows and outflows over time show that money that flows into gold ETFs are ill-timed.

The World Gold Council, an industry body, reports that Asian investors were actually net sellers during the first quarter, while Westerners bought heavily and sent prices soaring.

Although relished as a safe haven, the volatility in gold is questionable for safety.

Don Dion for TheStreet explains that while investors focus on the actual metal, the gold mining stocks actually get ignored, even though they’ve been outperforming the metal so far this year. This can present opportunity, especially while inflation fears are fresh. While gold miner stocks can be twice as volatile as gold prices, investors have been willing to brave the risk/reward scenario for the potential upside in 2009.

How can you avoid a bubble? Read on. Protect yourself from volatility by having a strategy; we use the 200-day moving average as a guide of when to get in and when to stay out.

Market Vectors Gold Miners (GDX): up 20.8% year-to-date

SPDR Gold Shares (GLD): up 8.3% year-to-date

PowerShares DB Gold (DGL): up 7.9% year-to-date

For full disclosure, some of Tom Lydon’s clients own shares of GLD.

Comments

[PastTense]

Most of us invested in gold are not interested in it as a short-term trading vehicle, but instead have the belief that in the long term massive inflation is going to develop (because of uncontrollable budget deficits as well as massive printing of money). That when that happens (which probably won't be in the next couple years anyway) that the price of gold will shoot through the roof. But we invest now while the price is still reasonable (and we are no good at timing the market anyway).

2009 Jun 15 09:01 AM

[The Geoffster]

Another reason to own gold (physical) is wealth preservation.

2009 Jun 15 09:32 AM

[Mad Hedge Fund Trader]

trapped in a box is more like it. I heard a little tidbit yesterday that makes me feel like I just ate a bad fish taco. Frontline, the world’s largest tanker company, says that it has 100 million barrels in storage, the equivalent of five days of US consumption, the result of the spectacular contango situation that exists in the crude futures market. Traders have been buying front month crude, storing it, and reselling it one year out for non leveraged profits of up to 75%. With spot now at $72.12, and futures for December delivery selling at $75.56, that spread has narrowed to an annualized 9.53%. The last crude top was made by the filling of the Strategic Petroleum Reserve. Could this intermediate top be put in by the filling of the world’s excess tanker fleet? This makes me worried not just about crude, but all of my longs in commodities and their producing stocks, the S&P 500, the BRICK’s, and everything else that has enjoyed a torrid doubling since the beginning of the year. Could gold’s poor performance this week, which dropped from $990 to $935, be the canary in the coal mine? And by extension, is it time to take profits on my short Treasury positions by selling the TBT, which has also doubled? There are just too many charts hanging around their 200 day moving averages to dismiss this lightly. I hate to sound redundant, but selling in May is looking more clever by the minute. Cash is King.

2009 Jun 15 10:20 AM

[Jeff Nielson]

I fail to see the point in writers who know absolutely nothing about the precious metals market attempting to "analyze" it.

Inflation-adjusted, gold would have to rise to roughly $2500/oz just to EQUAL the 1980-high. Referring to that as a "bubble" is the epitome of ignorance.

2009 Jun 15 11:30 AM

[yellowhoard]

And, that is assuming the government's official inflation figures are accurate.

2009 Jun 15 12:37 PM

[Whippet]

Right on. Gold is FAIRLY priced right now; silver is CHEAP. This doesn't even take into account the UNDERvalued fundamentals of Ag; it is nowhere near its natural ratio of 17:1 with gold. It has far more industrial demand than gold, and far less bullion exists. As long as fears of inflation persist, the ratio will hang where it is, and gold will hang where it is. But as soon as these fears become reality, gold will lift, and silver will skyrocket. There's just not enough gold to go around (one ounce per person globally, and only half an ounce has been mined). Joe Six Pack can't buy too many Krugerrands, but he can and will buy American Eagles.


On Jun 15 11:30 AM Jeff Nielson wrote:

> I fail to see the point in writers who know absolutely nothing about
> the precious metals market attempting to "analyze" it.
>
> Inflation-adjusted, gold would have to rise to roughly $2500/oz just
> to EQUAL the 1980-high. Referring to that as a "bubble" is the epitome
> of ignorance.

2009 Jun 15 01:12 PM

[optionsgirl]

Investing in GLD or SLV or GDX, etc. is no more like investing in precious metals than investing in YUM means you are buying crispy fried chicken. Precious metals investors hold the real thing. Traders trade, gold bugs buy and caress.

2009 Jun 15 01:59 PM

[SugarDaddy]

In the 20's an ounce of Gold would buy you a decent suit & tie. Again in 2009 an ounce of Gold will do the same $950.

Case closed for me !

2009 Jun 15 03:08 PM

[KIT]

When hyperinflation comes I will look for the people in the new suits ....... they must have gold at home..................


On Jun 15 03:08 PM SugarDaddy wrote:

> In the 20's an ounce of Gold would buy you a decent suit & tie.
> Again in 2009 an ounce of Gold will do the same $950.
>
> Case closed for me !

2009 Jun 16 12:19 AM

[TheeSeer]

Every time some "expert" says gold pays no interest and is a "bubble" I want to laugh. Gold is money period. The dollar itself pays no interest and has lost 81% of its purchasing power since 1971. Has gold? Not a chance.

If you are over 40 you know what I'm saying. Inflation is not "subdued" it is held down by enormous unemployment. The BRIC countries are calling for a new reserve currency and when that happens the resultant collapse of the dollar will make current commodity prices look cheap. Now when unemployment recovers to mere distressed levels and our rediculous current account balance gets even worse as we import our way to Hell you will remember my words. "Dont' wait to buy gold, Buy gold and wait".

2009 Jun 16 09:35 AM

[376602]

The downdraft in commodities below their 200 day MA might one day also be named, Geittner's Last Stand or "the buck stops here".

2009 Jun 16 11:56 AM