Bernanke Speaks, Gold Sinks
Gold ETF products followed gold prices lower this past week as Wednesday's testimony by U.S. Fed Chairman Ben Bernanke put cold water on hopes of a QE3. Bernanke cited modest economic growth in the U.S. and a view that the recent oil price spike was temporary, thus dashing hope that more liquidity (U.S. Dollars) will be introduced into the financial system. Bernanke's testimony immediately caused the value of the U.S. Dollar to increase and thus the value of gold, primarily priced in U.S. Dollars, to fall. Here's a six day performance chart showing the U.S. Dollar versus the price of the largest physical gold ETF, GLD. No reminders are needed as to what day Bernanke delivered his testimony this past week.
Physical Gold ETFs
Having lost close to 3.5% of their value for the week, physical gold ETFs have a year to date gain of about 9.5%. This return is almost identical to the 2011 physical gold ETFs' entire return of a bit over 9%. 2012 has delivered a nice rebound gold in gold prices year to date and driven the iShares Gold Trust's (IAU) best in class performance. As the lowest priced physical gold ETF available, IAU leads its peer group with a 9.5% return in 2012. IAU also leads the group over the last 12 months, gaining close to 19% during that period. SGOL, the ETFS Swiss Gold Trust, is currently the second best performing physical gold ETF year to date and over the last 12 months. Here's a portion of the ETF performance grid from GoldETFs.biz.
Gold Stock ETFs
Gold stock ETF products fared a bit differently last week. The largest ETF in the group, GDX, lost a bit less than 3% and the second largest gold stock ETF, GDXJ, lost close to 6%. GDX had been lagging the other gold stock ETFs in performance in 2012 and thus had less ground to give up. In addition, its large cap focus generally makes it less volatile than small cap focused ETFs like GDXJ.
Despite the losing week GDXJ is still the best performing gold ETF across the gold stock and physical gold categories year to date, delivering a gain of over 12%. Still, it is important to note that all gold stock ETFs are still in negative territory over the last 12 months due to an abysmal 2011. Here's a selection from the gold stock ETF performance grid from GoldETFs.biz.
Gold's sharp downward movement based off testimony from the Fed Chairman shows there is a lot of speculative money attracted to gold. Clearly for those watching the U.S. Economy or the world economy, it is apparent that record low interest rates and the liquidity measures in place from Central Banks are only producing modest economic results at best. This means that extending or increasing these accommodative policies is likely to happen. That trend is good for gold over the long term and thus the snap downward in Wednesday's gold price based off Fed testimony indicates that gold is attracting short term speculators.
Volatility In Gold
In the short term, gold's price should continue to be volatile as speculators try to time the markets and a variety of geopolitical events loom. For longer term gold investors this should mean that buying opportunities will emerge on knee jerk downward reactions. However some of these negative price reactions could expand a lot longer than a week as we witnessed near the end of 2011. Stock based ETFs should offer a way to magnify those buying opportunities, as they tend to be more volatile than the price of gold. (Especially small cap focused ETFs like GDXJ.)
Inverse & Leveraged Gold Products
There are also inverse and leveraged gold exchange traded products (ETPs) which are designed to trade daily swings in gold prices too. Here's the complete list of these types of products, which are aggressive in nature and are generally designed for one day holding periods. Leading products in this space by volume and assets include DGP, NUGT, DZZ, DGL and UGL. As always, but particularly in this product set's case, be sure to read and understand the prospectus before considering an investment in any type of security.
Source: GoldETFs.Biz Leveraged & Inverse ETP Grid
A Golden Guideline
Whether a trader or a long term investor in gold, one key gold guideline to monitor is the 200 day moving average price of the largest gold ETF, GLD. This should be able to provide worthwhile perspective on the historic price level of gold and how it compares to gold's ongoing price. When GLD has neared or violated its 200 day moving average over the last three years it has eventually been a buying opportunity. Here's GLD's 200 day moving average chart from stockcharts.com showing the last three years of data.
There are a variety of catalysts that could materially affect the price of gold one way or the other including oil prices, a conflict in Iran, a flare up in the EU debt crisis and as we have witnessed this past week, Federal Reserve comments. While gold prices and ETFs are likely to be volatile in the short term, the supply and demand picture for gold appears to signal a continued long term bullish trend.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.