On Wednesday the Federal Reserve announced a commitment to easy monetary policy as far out as 2014. This will take the form of low interest rates and other accommodative measures. Immediately the U.S. dollar reacted and fell to new lows for the year. The dollar's weakness and additional liquidity ignited gold ETF products across the board and added to existing gains to begin the year. In fact physical gold ETFs now have a chance to surpass their total return number for all of 2011 - in the first month of 2012 - after moving close to 3% on Wednesday. Meanwhile stock based gold ETFs are off to an even stronger start in 2012, after moving over 6% on Wednesday alone. Here's a review of each category.
Physical gold ETFs finished 2011 just shy of a 10% gain. A stronger U.S. dollar combined with selling pressure on gold by investors seeking to raise cash cut physical gold's return in half in December. Gold has benefited in 2012 however from a weaker dollar, an end to the year end raising of cash by investors and the Fed's most recent comments. The iShares COMEX Gold Trust (IAU) has shown the strongest performance year to date. It is likely that this performance difference is primarily due to the lowest expense ratio of all physical gold ETFs at .25bps. Likewise the largest gold ETF, the SPDR Gold Trust (GLD) trails the three primary ETFs in this space likely due to the highest expense ratio at 40bps. Overall, while physical gold ETFs have had a great January, they still are a bit behind their most recent highs in early December 2011. Here's a year to date performance chart of all the products in this space from GoldETFs.biz.
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The lowest expense ratio physical gold ETF is leading the pack year to date.
Perhaps the more surprising performance in 2012 has been delivered by gold stock ETFs. These products disconnected from their historical relationship to gold prices in 2011 and had varying degrees of poor performance. As highlighted by this site previously, some thought that gold stocks would return to their historical patterns in 2012 but no one could foresee a gold stock "spring" occurring in the month of January. Indeed, with gold prices up close to 10%, gold stock ETFs have risen 7 - 17% to begin the year. Most interesting is the performance of the Market Vectors Junior Gold Miners ETF (GDXJ). Formerly the poster child for gold stock disconnect in 2011, GDXJ has now reversed course and is reacting in line with gold price movement. Here's a list of all gold stock ETFs and their performance over various periods year to date.
Wednesday was a great day to own gold stock ETFs.
Going forward it appears that U.S. dollar strength or weakness is the most direct factor influencing gold's behavior. Should Europe get worse, the U.S. dollar would likely strengthen hurting gold prices. Likewise if Europe is able to navigate its way out of its crisis in a way that keeps the Euro relatively stable with the U.S. dollar, that would be flat to positive for gold. In addition, further U.S. monetary or fiscal policy comments from the Fed or due to the Presidential election cycle should help to boost gold. This is because the U.S. deficit and economic conditions seem likely to be addressed by more liquidity (dollars) being introduced into the financial system - which ultimately devalues the dollar.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Christian Magoon is the publisher of GoldETFs.biz.