Do Not Give Up On Gold ETFs: New Highs This Year

Includes: GDX, GLD, IAU
by: Matthew D. McCall

It is hard to believe that the SPDR Gold ETF (NYSEARCA:GLD) was up 9.5% in 2011 with the large amounts of negative press surrounding the precious metal. Granted it did nearly fall into bear market territory after hitting an all-time high on 9/6/11, but that is no reason to give up completely on gold.

Reasons I Remain Bullish

I look at the year ahead with two likely scenarios unfolding for the global economy. The first involves the European situation being resolved in a manner that investors deem sufficient. This will lead to a global stock market rally and bring the risk-on trade back in full force.

In this scenario the euro will likely rise, pushing the U.S. dollar lower. In the last few months the U.S. dollar Index has done well as investors have been fleeing the euro in favor of a "safer" currency. I have a long position in the PowerShares DB US Dollar Index Bullish ETF (NYSEARCA:UUP), however long-term I feel the greenback will continue lower.

The weakness in the U.S. dollar will be a positive for commodities, including gold, and would be one factor for higher prices. The other is that the risk-on trade is back and there are a handful of funds and investors that view gold as an asset class that moves higher in that type of environment.

The second scenario, which I do not believe is as likely, is that the European mess explodes and the euro continues its current dive. This would push money to the U.S. dollar as the safe haven currency. The one wild card is that I believe it will also have money flowing into gold as the ultimate safe haven asset class. In this situation the U.S. dollar and gold can move higher together.

Gold ETFs

The two large gold ETFs are GLD and the iShares Gold ETF (NYSEARCA:IAU). The largest is GLD with an expense ratio of 0.40% and IAU has slightly lower expense ratio of 0.25%. Both ETFs have basically identical returns, except of course IAU has the lower expense ratio.

As the price of gold bullion fell the gold miners took an even bigger hit. The Market Vectors Gold Miners ETF (NYSEARCA:GDX) fell 26% from the 2011 high down to the low set the second last day of 2011. The one-year low set that day has held strong and it appears the ETF has found some footing and is ready to begin a new leg higher.

Buying When Everyone Is Running For the Exits

One of the hardest things to do in life, not just investing, is to run in the opposite of the masses that are running for the exits. If you join them, you can always convince yourself you did the right thing because everyone else was doing it. Unfortunately that mentality does not equate to making money in the stock market.

This is one of the situations where I feel as the masses are giving up on gold, investors who own need to hold steady and those investors who have been looking for an entry point - here you go.

Disclosure: I am long GLD, IAU, UUP.