Gold ETF products had another profitable week and have built on their positive start to 2012. Most physical gold ETFs have now gained over 6% for the year after a week with 1% gains. Here's the performance chart for all physical Gold ETFs courtesy of goldetfs.biz.
Physical gold ETFs continue their positive start to 2012.
Gold stock ETFs have also participated in the gold rebound since December. Unlike physical gold ETFs, there is more dispersion in the performance of gold stock ETF products. Leading the way is GDXJ, the junior gold miners ETF which has gained over 9% this year. It leads all physical and stock based gold ETFs in performance for the year. Lagging the gold stock pack is GDX, the gold mining ETF that is larger cap in nature. It has significantly underperformed physical gold ETFs this year after a tough last week of performance.
Gold stock ETFs have varied in performance in 2012.
Reversal Of Fortune
Gold has reversed its December sell off for a variety of reasons - here are two. First gold was targeted for sales by investors towards the end of the year as a way to raise cash and as a rebalance casualty. This put pressure on gold prices. In early December, physical gold ETFs had gained close to 20% for the year but in the last portion of December gold gave up about half of its gains to return just 9% for the year. As the new year began, most investors had finished raising cash at gold's expense and it has helped gold's performance.
Secondly the stronger U.S. dollar had put considerable pressure on gold prices in late 2011. Because gold is denominated in U.S. dollars a stronger dollar means gold costs less dollars. However, in 2012 gold has fared far better than the dollar. Here's the performance chart comparing the largest gold ETF, [[GLD] to the U.S. dollar. Notice the plunge gold took in late December versus the dollar and also the rally that occurred since the end of 2011. This chart is courtesy of stockcharts.com.
Gold has started 2012 well ahead of the U.S. dollar.
There are a variety of concerns about gold prices however. China has announced slower economic growth data and some believe the world's second largest gold consuming country could slow down its gold buying in the future. Others believe the slower economic growth data from China will lead to further easing of monetary policy in China and be a catalyst for gold buying however. India, the third largest consumer of gold after being passed by China last quarter, is dealing with a slower economy and a weaker rupee. This has caused India's gold demand to drop significantly. Finally an ever present concern is the return of a stronger U.S. dollar. Should a flare up in the EU debt crisis occur again - the U.S. dollar is likely to benefit as investors seek "safety." Although that benefit could be temporary for the dollar, gold investors would suffer. In addition this could spark further sales of gold in the short term by investors in need of harvesting gains to raise cash.
Positive Gold Catalysts
The most likely catalyst for gold prices rising would be another "g" word - government. Whether QE3 in the United States, a euro bailout, or the easing of money supply or interest rates in China/India, governments around the world appear to be poised to introduce more liquidity to the system. That influx of liquidity across the globe, or in several key markets, is likely to increase demand for gold at a time when the dollar could lose value - a double shot of caffeine to push gold prices further.
It also should be noted that a special situation has emerged as a potential catalyst for gold prices: Newt Gingrich. After a weekend victory in South Carolina, Newt has a legitimate chance to earn the U.S. Republican Presidential nomination. Gingrich believes "a dollar is as good as gold" and announced that if elected he will form a commission to review the gold standard and other ways of creating a "hard dollar." A Presidential contest that highlights a "hard dollar" - with gold as a central discussion point - can only benefit gold going forward. This is despite the small chance an actual gold standard would return for the U.S. dollar.
Gold Rallies But Off 52 Week High
Gold, as measured by the GLD ETF, has had a one year gain of about 22% as displayed in the following chart from stockcharts.com
Gold is still off 2011 highs.
Gold is still well off its high last year and has bounced nicely in 2012. The precious metal could easily rally more should governments step in and introduce more liquidity to the financial system. A stronger U.S. dollar however appears to be the largest risk to gold prices going forward and could cause another gold correction similar to the end of 2011. Whatever the case, gold ETFs - both physical and stock based - continue to remain conveniently well positioned to monetize a market view on gold.