Gold Is Still Golden

May.16.12 | About: SPDR Gold (GLD)

SPDR Gold Trust (NYSEARCA:GLD), the exchange-traded fund that is the largest gold-related exchange-traded product and the world's second largest ETF by market capitalization, has received extensive scrutiny by the markets over the last months and years - and rightly so. As the largest and generally most convenient way for retail investors to trade in gold bullion shares, GLD represents a go-to safe haven for those worried about depreciating currency values, underperforming assets in a stagnating economic climate, and general capital maintenance for the long-term.

With rumors of the Federal Reserve considering a third round of quantitative easing in June, gold prices have tremendous upside potential. Even if this is not the case, Eurozone economic uncertainties and the Spanish and Greek sovereign debt crises specifically have a compelling influence over the price of shares in GLD. Even current critics of the "gold is good" thesis acknowledge the power of gold as a safe haven for worried investors who are losing confidence by the day:

Now that the Swiss franc is pegged to the euro, many consider gold to be the last remaining safe haven, as the once strong franc will now be dictated by the movements of the drowning euro.

While the contention that gold has no dividend yield or underlying benchmark is true, the fact remains that - unlike tulips or collateralized debt obligations or real estate prices - gold is one of the few assets throughout human history that has retained its value despite naysayers' claims that a bubble-burst is imminent. We assign gold inherent value, for arbitrary and predefined reasons. So it's perfectly alright that the metal simply sits in vaults all over the world, doing nothing. This argument is not one that invalidates the lucrative nature of GLD as an opportunity for capital gains.

Another major argument of critics of this thesis relies on the idea that gold is currently overbought, and that portfolio managers around the globe who have held gold over the last several years are now planning to sell it to realize their profits. However, this idea is fatally flawed: technical indicators of momentum and relative strength over the medium term demonstrate that, if anything, gold is priced relative to market demand.

Any individual selling gold today is missing out on a tremendous opportunity to continue their winning streak, as the global economic climate shows few signs of convalescence. Thus, these critics would point to such factors to represent the downside risk of investing in an ETF such as GLD, but the bigger picture demonstrates that the upside potential far outweighs in both scale and magnitude.

Barring any U.S. Federal Reserve action this June, one analyst succinctly discusses what could drive gold asset prices to over $2000/oz in the near future:

Gold was going up before QE was even a term in the English language. Gold went from somewhere around $300/oz to $800/oz before we had QE. The thing that drives gold is not dramatic-it's not like a new round of QE and it's not geopolitical; it's the fact that real interest rates are negative right now, close to 3%. So, if you have money that's saved up and you want to put it in a bank or want to put it in treasuries, you're losing about 3% a year. And you have to think about something else.

You could consider a lot of options. Gold is certainly on that list. Last summer, when gold got to $1,900/oz, the story was overcooked. The press was hyperventilating about the government shutdown over the debt ceiling and the downgrade of the U.S. debt rating.

We've gone from that situation, where it was basically boiling over, back to a simmer. The stove is still on. Real rates are still negative-with the promise of more of that. I can speculate as well as the next guy can on what's going to be the next thing, and it may be QE. QE could come about simply because the Fed has been buying 61% of all new treasury issuance for the last year. If it goes away, as Bernanke says it will at the end of June, what's going to happen to short‐term rates? What's the market going to demand if the Fed's not there buying treasuries?

There do exist other ETFs for retail investors looking to invest in gold, and even some leveraged alternatives: UBG, SPGH, GOE, AGOL, SGOL, and FSG. However, GLD remains the best fund due to its favorable expense ratio, management structure, and liquidity.

Gold is still golden, and GLD - now more than ever - will continue to represent a safe-haven asset in the weeks and months ahead. Holding more physical gold bullion than China and slightly less than France, the physical gold assets of GLD are safe in bank vaults across the United States. From a long-term value perspective, I'm confident the shares of GLD in my portfolio are just as safe. Thus, I plan to hold my many shares of GLD for the medium term at least, and, watching the actions of European leaders and Federal Reserve officials closely, may even accumulate some more.

Disclosure: I am long GLD.