As investors like Soros flee gold and the GLD the search is on for inflation protection for 2013 if it can't be found in precious metals.
Most everyone is aware that gold and the ETF GLD are considered mainstays of value during inflationary periods such as this. The problem with gold and the GLD is that they do not pay dividends while the outlook improves over time, therefore, many have witnessed a bearish technical trend in GLD while others are identifying this as a narrowing range. To be sure, I am planning on volatility in the GLD, although fundamentals are setting up for long term bullishness for me. When my fundamentals and technical are at o1dds, I prefer to reconsider my investment than focus funds allocated as defensive money toward market timing. That said, the inflation risk from the QE programs is too great to bail out of defensive investments altogether simply because there might be significant volatility in precious metals.
Inflation protection can be found in many areas of the market, one could be the consumer discretionary sector. In my opinion, prices in this sector accounts for inflation as well as any other measure. See the below chart comparing SPDR sector ETF XLY consumer discretionary against the inflation-busting GLD over the last two years:
I'd like to highlight the divergent theme between the GLD and the XLY over this timeframe and the steady acceleration in the XLY. Based on my assumption of upcoming GLD volatilty and potential downside risk as an imptetus to reevalute inflationary defensive investments, I see the XLY with room to the upside inasmuch that inflation has remaining influence on the ETF. XLY main holdings are companies like Comcast (NASDAQ:CMCSA), Home Depot (NYSE:HD), Amazon (NASDAQ:AMZN), McDonalds (NYSE:MCD)and Disney (NYSE:DIS). If there is price pressure on consumers, I hope to count on the these leaders to continue to navigate the inflationary environment well.
The primary risk to reallocating GLD money to XLY is that while the investor is supplanting inflation risk well with a negligible impact on inflation risk, the market risk increases significantly. If protecting assets from inflation then the XLY as an alternative to the GLD should catch your attention, however, the XLY is less an alternative to currency risk or market risk
Disclosure: I am long HD.