Gold prices hit close to $2,000 per ounce last year, and related exchange traded funds followed. So far in 2012, prices have not been able to stabilize over $1,700 per ounce. Meanwhile, the best first quarter gain for the S&P 500 has sent U.S. equities over gold for the first time in over 10 years, possibly indicating a shift in the market.
“The problem with gold now is that people are starting to accept the economic recovery,” Laszlo Birinyi, president of Birinyi Associates, told Bloomberg News. Even as confidence builds, “people are still too focused on the concerns and the fact that this looks similar to last year, where everyone said sell in May and go away,” he said. “That’s exactly the kind of thing we look for.” [Don’t Get Fooled by an ETF’s Name]
Holdings in bullion-backed exchange traded products such as SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL) hit a record last month. [Gold ETFs Rise to Test 50-Day Average]
Although stocks have begun to diverge from gold prices and defensive investments, bearish outlooks warn that more stimulus may still be needed in the U.S. as the rally has carried on too long, reports Srinivasan Sivabalan and Whitney Kidling for Bloomberg. [The Bullish Case for Gold ETFs]
“If the Fed reinstitutes quantitative easing measures later in the year, coupled with rising fiscal deficits and currency debasement among countries in the developed world, then gold may continue to hold an underlying bid,” Ioan Smith, director of Knight Capital in Europe, said.
Matthew Lynn for MarketWatch reports that the bull run for gold could gain traction again, so don’t count the precious metal out yet. Factors supporting a run for gold include:
- The developed world central banks should all be increasing their gold reserves dramatically. The best way would be by refilling their vaults with the precious metal. In his budget last week, British Chancellor George Osborne caused a small flurry in the markets with a line that suggested the Bank of England might start stockpiling gold.
- In common with most developed countries — Japan excluded — the U.K. has no reserves worth speaking of. In truth, what is interesting is how low the reserves held by all the developed nations now are. Switzerland is the only European country with significant reserves, with $340 billion squirreled away, while Germany has $257 billion, and France has $172 billion. The U.S. only has $148.5 billion, reports Lynn.
- Stockpiling reserves are important because it is critical if there is a financial crisis. It helps prop up a banking system and it gives a country the ability to intervene in the currency market. By having something to sell, the chance to manipulate the market is stronger. As paper currencies are losing value, the more gold reserves a country has, the better off it will be.
ETFS Physical Swiss Gold Shares
Tisha Guerrero contributed to this article.
Full disclosure: Tom Lydon’s clients own GLD.