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Gold ETFs
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About Gold ETFs |
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Gold ETFs Overview and forecast
Gold spent some time in the lower price ranges in the earlier part of the decade, and during the crash it came back with a vengeance. Since September 2008, the Gold ETFs have generally been outperforming the Dow. However, it's been a wild ride, with significant moves up and down, and large spikes in prices.
There have even been some new Gold ETFs on the market, notably ProShares Ultra Gold ETF, (Amex:UGL) which in its six months has spent most of its time above the Dow. Gold is one of the traditional safe havens still, and the buying has been maintaining good prices for most of 2009 with occasional small dips.
Gold is a straight up and down commodity, and it doesn't have the complexities of things like oil. There are of course natural investment methods like futures, options, etc, as additional investment earners, but generally speaking gold is unique in its behavior. Prices have had historic highs and lows. Some of the lows were the result of freakish events, like the Soviet Union liquidating a large amount of its gold holdings. Others were the result of oversupply in an apathetic market where stocks were booming. The historic highs tend to be a result of short supply or economic crises.
Gold was also subject to increasing demand from emerging economies like China and India which was putting some upward pressure on the gold prices pre crash, with production actually somewhat strained to keep up with demand. The crash simply accelerated the process. The gold market, because of its historic drivers, needs to be viewed in all three basic long, medium, and short terms for a coherent investment strategy.
Short term (6 months)
The Gold ETFs have been doing well in the new environment, although the short ETFs have naturally been finding it a tough market. Trading has been pretty solid, and the prices have been providing good margins. There have been big reactive moves, however, and that's the primary cause of concern for short term investors and traders.
Gold can be quite a perverse commodity. It's fair to say that gold is often bought on emotion, and sold on rationales. Whether those emotions and rationales make much sense to investors or traders is another matter. Gold attracts big investors, and gold professionals aren't risk takers. They hedge, they sell short and long, and they take positions in terms of short, medium and long terms. That's a good reason for investing in the Gold ETFs as part of a broad asset spread of investments. The short term for the Gold ETFs looks good, provided traders cover all angles.
Medium term (2 years)
The medium term prospects are less obvious. If the global economy returns to its previous state, there will still be some strength in gold, because of demand. That said, gold is never static. The recent long period of low moves in prices was atypical. Its price moves, and is rarely if ever in a static bandwidth over a period of years. That has to be factored in regarding any consideration of a medium term position.
The market is quite likely to be cautious about long positions, in such an erratic commodity, even if it is gold. The problem is that prices which start at near historic highs have some obvious negative factors built in. They can (a) do nothing much, and tie up capital, or (b) go down like a millstone. Investors have to see a positive upside with commodities, and high prices can be a real turnoff. The time/ value of returns factor is very important here, and the price moves of the Gold ETFs are an example of a highly sensitized market. The medium term doesn't show signs of generating big upsides from the post crash highs.
Long term (5 years)
A five year cycle in gold prices can be anything, quite literally. It took gold an excruciatingly slow 5 years from 2000 to 2005 to go up $100 on the London market from $300 to $400. Eighteen months later it hit $700, briefly, before settling back to around $600. Between July 2007 and May 2009, it moved from $800 to nearly $1000, back down to $750- ish, back to nearly $1000, and back to $750, before hitting a relative average at around $900.
Great for traders, but as you can see from this movement, where and when you buy has a lot to do with your results. A long position in 2005 would have more than doubled your money. The peaks, however, would have cost you money, and you'd be at break even or slightly better or worse now, if you bought in the times close to the peaks. The same applies to the Gold ETFs. A spread will be relatively painless, but the gold prices ultimately call the shots.
Qualifier to projections
People have been investing in gold for thousands of years, and doing quite well out of it. It's only the modern investment market where things have become truly difficult and dangerous. This is a case where the belt and suspenders hedging approach of the gold professionals is definitely the best approach, particularly in a high price environment, where downside is more likely than upside.
Gold can be a very high return investment, with ROI that makes the main stock indices look tame. It's not a get rich quick scheme by definition, however. The dull, slow period between 2000-2005 also included the start of the bull market, where the Dow was pushing records. You can guess where the big money was playing during that period. The Gold ETFs are a good thing to put in any portfolio, but investors must be realistic about the ferocious gold index. This is where spreads pay off in the long term and trading pays in the short and medium terms. Model your investments, watch the markets, and you'll sleep better at night.
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Last Updated on: 2010-01-14 02:03:40 |
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