This year gold has experienced a surge in price as the U.S. dollar has weakened and investors have flocked to safety. But does this rally in exchange traded funds (ETFs) have legs, or is it gearing up to wind down?
National Public Radio noted that gold prices hit a fresh record yesterday. Futures contracts for the precious metal traded at $1,167 an ounce. It could hit $1,200 more quickly than some traders were expecting. Analysts are expecting interest rates to stay low, meaning the dollar will stay weak – two conditions that foment higher gold prices. (Play the gold rally with gold miners ETFs).
Adam Hamilton for GoldSeek reports that the largest gold-holding ETF is the SPDR Gold Shares (NYSEArca: GLD) which holds more gold bullion than any other country. Today, this remains the one of the easiest investment tools to gain exposure to the precious metal. By owning a gold fund, you own a share of physical gold without the hassle and expense of finding storage. (Gold plays with ETFs.)
Other ways to access gold, according to Reuters, include:
- Futures. The futures exchange involves people trading in contracts to buy or sell a particular commodity at a fixed price on a future date. The COMEX division of the New York Mercantile Exchange is the world’s largest gold futures market in terms of trading volume. ETFs have simplified access to futures contracts; rolling forward is handled for you.
- Spot market. Large buyers and institutional investors generally buy the metal from big banks. London is the core of the global spot market, with some $18 billion in trades passing through London’s clearing system each day. To avoid cost and security risks, bullion is not usually physically moved and deals are cleared through paper transfers.
- Bars and coins. Retail investors can buy gold from metals traders selling bars and coins in specialist shops or on the internet. ETFs have simplified the access to this market.
- Mining companies. If you don’t want to deal with physical metal or futures contracts, why not make a play on the companies that mine the metal? They, too, benefit from higher gold prices. The cost of mining gold is fixed, so anything on top of that becomes gravy.
Jonathon Ratner for Financial Post reports that gold can become stronger even on a modest bounce of the U.S. dollar. Fundamentals surrounding gold are making it more attractive, meaning gold as an inflation hedge becomes an obvious choice among investors.
Meanwhile, central bank reserve sales, which have played a key role in keeping gold prices in check during the past decade, have slowed recently, according to Citigroup.
- Market Vectors Gold Miners ETF (NYSEArca:GDX): up 52.5% year-to-date
- Market Vectors Gold Miners Juniors (NYSEArca: GDXJ): up 8.5% since inception
- SPDR Gold Shares (NYSEArca: GLD): up 32% year-to-date
- iShares COMEX Gold Trust (NYSEArca: IAU): up 32% year-to-date
- PowerShares DB Gold (NYSEArca:DGL): up 30.2% year-to-date
For full disclosure, Tom Lydon’s clients own shares of GLD.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.