Gold ETF Performance And Outlook

by: Christian Magoon

Gold ETF products from physical to stock based ETFs lost value last week breaking their recent winning streak. Physical gold ETFs were off about 1% and stock based gold ETFs fell a similar amount. Even so gold ETF products have now gained between 10% and 19% year to date.

A variety of factors contributed to gold's decline last week, chief among them was the continued positive economic data coming out of the the United States. Positive job data surprised on the upside and showed unemployment falling to 8.3%. This in turn has subdued market expectations for a QE3 - which would be a positive for gold.

In addition the U.S. dollar gained strength relative to gold. 2012 has seen the dollar lose considerable value relative to gold as "risk on" has dominated the market. This past week saw the performance of the dollar and gold close a bit, especially after Friday's job report. Here's the performance chart from of the U.S. dollar versus gold (represented by the largest physical gold ETF, GLD) over the last five days.

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Friday's economic data hurt gold and flatlined the U.S. dollar.

In addition, gold's price appreciation has undoubtedly led to some profit taking one month into the year. With physical gold rising over 10% thus far, it has eclipsed its entire return for 2011 yet there are still significant concerns facing the price of gold. Chinese demand has been subdued of late and its economy is slowing. Last year China surpassed India as the second largest consumer of gold in the world. In addition, India is beginning to show signs of increased demand but is still dealing with problems like inflation and currency fluctuations. Finally the EU debt crisis seems to be fairly orderly but a flare up could send investors flocking toward the U.S. dollar. When this happened last December, gold gave up close to half of its gains - around 9% - in just a few short weeks.

Gold stock ETFs continue to lead all gold ETFs in performance this year. In a significant change from 2011, the junior - or small cap - gold miners ETF is outperforming the large cap version. In fact the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) has gained 19.8% year to date, leading all gold ETFs. In contrast the Market Vectors Gold Miners ETF (NYSEARCA:GDX), which owns large cap gold stocks, has been the worst performer in the gold stock category with a gain of 9.7%. Surprisingly GDX is actually underperforming every gold ETF this year. It should be noted however that all gold stock ETFs are still in negative territory for the last year, unlike physical gold ETFs. Here's the performance chart of all gold stock ETFs.

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GDXJ continues to be the best performing Gold ETF in 2012.


As mentioned before, physical gold ETFs have risen a bit over 10% in 2012. In fact they now have gained more than 25% in value over the last year. The big surprise last week has been ETF Securities' AGOL which custodies its bars of gold exclusively in Asia. This ETF surged 4.75% for the week. AGOL is the smallest physical gold ETF at about $77 million in assets so its unusual performance for the week is likely due to unusual demand. Nevertheless, we will keep a close eye on this ETF. IAU from iShares continues to lead the rest of the physical gold ETFs in performance. Its peer group low expense ratio of 25bps is contributing its outperformance of around 10bps year to date. Here's the performance chart of all physical gold ETFs.

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IAU continues to lead mainstream physical gold ETFs.


Going forward it appears that profit taking in gold, the strength of the U.S. dollar and physical demand data from countries like China and India will be significant influences on gold prices. Geopolitically, the EU debt crisis and a potential conflict in Iran are the most prominent potential catalysts for a significant change in the pricing of gold. Finally, stock markets around the world are starting the year on a close to unanimous positive note. Equities could start to channel more inflows at the expense of gold in the short term. In the longer term however, gold seems to be attractively priced as many believe the $2000 mark will be challenged in 2012.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.