Central Bank Stimulus Boosts Gold ETF Outlook

Includes: GLD, IAU
by: Tom Lydon

Gold focused investments and exchange traded funds have rallied on more easing measures from central banks. The Federal Reserve, European Central Bank and Bank of Japan have all announced additional stimulus in the past month with moves that could weaken their currencies.

Policies that devalue currencies are another reason to consider a physically-backed precious metal ETF.

"The greatest boon for gold investors has been the rise of gold bullion exchange-traded funds. Suddenly, trading in gold has become cheaper, simpler and more liquid. No more filling out forms in triplicate and being escorted to the vault to collect your bars of gold. True, ETFs don't feel as nice as a bar of the good stuff, but then what do feelings have to do with being a rational investor? " Vikash Jain wrote for Financial Post.

Some investors use gold ETFs to protect themselves from a weaker dollar and the Fed recently announced its third round of quantitative easing, or QE3.

"So far, gold and silver have been the main beneficiaries, rising in the week before the FOMC meeting in anticipation of more stimulative monetary policies, and then, after the announcement, reacting to the even-more aggressive monetary stimulus than even the most liberal observers had expected," Jeffry Nichols of Rosland Capital wrote in a recent note.

Seasonal factors may also support gold ETFs due to buying in India and China.

The amount of gold held for investment reasons has multiplied and gold ETFs now hold 81 million ounces of gold, or up $54 million over the past 5 years. Since more gold is circulating there is less supply and more upward pressure on prices.

The largest gold ETF, SPDR Gold Shares (NYSEARCA:GLD), has gained about 13% over the past quarter, and holds $74 billion in assets under management. The iShares Gold Trust (NYSEARCA:IAU) has also gained about 13% over the past three months and has about $11.2 billion in AUM.

SPDR Gold Shares

Click to enlargeTisha Guerrero contributed to this article.

Full disclosure: Tom Lydon's clients own GLD.

Disclosure: I am long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.