Gold exchange traded funds took their lumps in late 2011 as prices pulled back by about $300 an ounce after hitting a nominal record high. The correction has some wondering if gold ETFs are indeed a safe haven, but confident precious metal bulls are looking for prices to rise to $2,000 an ounce and beyond next year.
After hitting a record high of $1,920.30 an ounce in early September, gold futures now sit just below $1,600 an ounce. SPDR Gold Shares (NYSEArca: GLD), the largest gold ETF and second largest U.S.-listed ETF, has fallen about 16% off its high earlier this year, but the fund is still up over 10% year to date.
The recent weakness in gold ETFs despite the still-raging Eurozone debt crisis has puzzled many. One theory is that investors are selling all “risky” assets, including gold, to raise cash and cover losses elsewhere in portfolios. [Are ETF Flows Sending a Warning Signal on Gold?]
“Gold has had to face its own headwinds, not caused by poor fundamentals, but by ‘investor meltdown’ as investors from European banks to cash-strapped individuals have needed to liquidate gold to cover shortfalls in other areas,” Julian Phillips, an editor at GoldForecaster, said in a MarketWatch report.
“This year was about liquidation — when portfolios were falling and participants needed capital, they turned to selling off precious metals that came off a solid first half,” Paul Mladjenovic, author of Precious Metals Investing for Dummies, said in the MarketWatch article. “In other words, precious metals were over bought in the first 6 months and oversold in the last 6 months.”
The most recent sell-off in gold occurred despite the bullish outlook, which has caused some to question the safe-haven status of the asset class. If the volatility continues, gold prices may get stuck in sideways trading. [Gold ETF Investors Say Pullback is ‘Excessive’]
“If the current economic crises going on in the world spill over into 2012 and contagion fears come to fruition in Europe, you could see the same volatility as what you saw in 2011,” Andrew Schrage, editor and founder of Money Crashers, said.
However, some observers believe that if the economy improves and Europe and China give their markets more wiggle room, the short-term pressures on gold will start to ease.
“This is very healthy for further gains in 2012, especially if we hold above $1,500. We could see the market trade in a range through mid summer,” John Person, president of NationalFutures, said in the article. Person predicts gold to peak between $2,200-$2,400 by late October 2012.
Over the long-term, gold bulls point to the loose monetary policies of the Federal Resrve and European Central Bank that will eventually debase their currencies and contribute to the attractiveness of gold.
“$2,000 gold can be delayed in the short term, but the fundamentals will carry it there sooner or later,” Mladjenovic added. “2012 has very bullish conditions so higher gold prices are more plausible.”
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Full disclosure: Tom Lydon’s clients own GLD.
Max Chen contributed to this article.
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.