Gold ETFs: All Aboard the Gold Train as Recognition Move Approaches
Since early 2009 we’ve written about the super-bullish long-term cup and handle pattern in Gold. It dates back to 1980 and has a logarithmic target of about $2,100. We noted that previous cup and handle patterns in Gold all reached their logarithmic target. We expect that this move to $2,100 will be the recognition move that awakens the masses to the Gold bull market and the reality of severe inflation in the near future.
Speaking of the near future, the relative strength of Gold in the face of a strong US dollar (or weak Euro) is one big hint that this recognition move is around the corner. We’ve noted this before and it is important to explain to new readers. Gold priced in foreign currencies has been leading Gold in US$ terms. It is true for the entire bull market and is quite evident in just the past few years.
In the chart below we use the foreign currency ETF (NYSE: UDN) to show Gold against currencies ex the US Dollar. The lower half shows Gold in US Dollars. Note how Gold/UDN is breaking away to new highs. That chart is so strong that it barely had time for even a small correction. Since Gold/UDN has been leading Gold reliably, this is an indication of what is eventually coming in the US Dollar price of Gold.
Nowhere Close to a Bubble
As Gold pierces $1200 and makes a new high, surely we will hear a new round of calls that Gold is in a bubble or it is a crowded trade. Be sure to avoid this unsubstantiated nonsense, as it will only serve to waste your time and inevitably reduce your net worth. Let me provide you with just a few pieces of information, which refute this baseless claim.
First, did you know that as of a few months ago, Gold equities and ETF’s only accounted for 0.7% of all managed assets in the world! Can you imagine how high precious metals could rise, if everyone in the world just put 2% of their assets in this sector? What if it was 5% or 10%?
Second, Jim Rogers recently spoke at a conference with, in his words, 300 big-time money managers. Apparently 76% of them had never owned Gold!
Third, superstar fund manager John Paulson of subprime fame has had great difficulty raising money for his Gold fund. Even one of the top fund managers can’t even convince people to get aboard the Gold train.
Finally, consider public opinion on Gold, courtesy of sentimentrader.com. In the past, public opinion followed Gold higher. Yet, since the end of 2008, public opinion has stayed in a range, while Gold has climbed about $300/oz. The public hasn’t budged despite the historic breakout and holding of $1000/oz level.
Policy Makers are Shooting Blanks
Mainstream and amateur analysts will make the claims that the Fed will tighten or that the government will get serious about its troubling finances. There is almost nothing the authorities can do to stop the coming inflation and the roaring bull market in Gold and Silver.
First and most importantly, because of the overall debt level, which is massive compared to 1980, the US cannot afford to let interest rates rise. If interest rates rise, the market will only lose greater and greater confidence in the US as the interest burden will accelerate thereby hurting the economy’s ability to grow and hastening the threat of bankruptcy. However, if interest rates remain low, speculation in hard assets will become rampant as these markets continue to rise, inflation ticks up and purchasing power declines.
Second, the Fed would have difficulty trying to tighten the money supply. Remember that to do this, the Fed would need to sell assets into the market. Remember, the Fed’s balance sheet consists of garbage assets that the Fed overpaid for. Yes they could raise interest rates but then how would the banks survive? They wouldn’t be able to borrow at 0.25% and repair their balance sheets. If the Fed would raise rates above the level of inflation, it would certainly end up threatening the financial system.
Moreover, as we’ve noted again and again, severe inflation results from a loss of confidence in a government’s ability to meet its debts. This manifests in a falling bond market, rising interest rates and currency weakness. Debt crisis’ go hand in hand with currency crises. Hence, we see Gold breaking out against numerous currencies even though “the banks aren’t lending” and “velocity is falling.”
The last line of defense is the Treasury market. If and when interest rates breakout to the upside, the authorities will effectively lose both control and power. At that point, the inflation genie will be out of the bottle. The action in Gold is already hinting at that outcome.
Conclusion
Even though Gold has risen nine years in a row, it is nowhere near a bubble. Just take a look at this chart courtesy of Frank Holmes. It compares Gold’s current bull market with its bull market in the 1970s.
Note that Gold rose about six-fold the first eight years into the bull market (it began in 1970). Ultimately it rose 25-fold. The Nasdaq from 1982 to 1992 advanced about four fold. Ultimately it rose 29-fold. The Nikkei advanced less than three fold from 1970 to 1978. From 1970 to 1990 it gained 19-fold. Gold is nine years into its bull market and has advanced less than five fold. See a pattern here?
If you’d like professional assistance riding the coming acceleration and eventual mania in the Gold and Silver market, then visit our website and consider a free 14-day trial to our premium newsletter.
Written By Jordan Roy-Byrne, CMT
Investors have turned to gold ETFs as a safe haven during the recent stock market turmoil. They offer a great way to protect you against risk in your portfolio during uncertain times. We have put together some other ETF options for your viewing below:
LONG:
The investment SPDR Gold ETF (NYSE: GLD) seeks to replicate the performance, net of expenses, of the price of gold bullion. The trust holds gold, and is expected to issue baskets in exchange for deposits of gold, and to distribute gold in connection with redemption of baskets. The gold held by the trust will only be sold on an as-needed basis to pay trust expenses, in the event the trust terminates and liquidates its assets, or as otherwise required by law or regulation.
The investment ETF (NYSE: GDX) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the AMEX Gold Miners index. The fund generally normally invests at least 80% of its total assets in common stocks and American depositary receipts (ADRs) of companies involved in the gold mining industry. The fund is nondiversified.
The Funds ETF (NYSE: GDXJ) investment objective is to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Junior Gold Miners Index (the “Junior Gold Miners Index”). For a further description of the Junior Gold Miners Index, see “Junior Gold Miners Index.”
The objective of ETF (NYSE: SGOL) the newly listed shares is to reflect the performance of the price of Gold bullion, less the Trust’s operating expenses. The Trust is open ended and is designed for investors who want a cost-effective(1) and convenient(2) way to invest in Gold as well as diversify their Gold holdings.
The investment ETF (NYSE: UGL) will seek to replicate, net of expenses, twice the performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London. The fund normally invests assets in financial instruments with economic characteristics twice the return of the index. It may employ leveraged investment techniques in seeking its investment objective.
The investment ETF (NYSE: DGL) seeks to track the price and yield performance, before fees and expenses, of the Deutsche Bank Liquid Commodity Index – Optimum Yield Gold Excess Return. The index is a rules-based index composed of futures contracts on gold and is intended to reflect the performance of gold.
The investment ETF (NYSE: DGP) seeks to replicate, net of expenses, twice the daily performance of the Deutsche Bank Liquid Commodity index – Optimum Yield Gold Excess Return. The index is intended to reflect changes in the market value of certain gold futures contracts and is comprised of a single unfunded gold futures contract.
The objective ETF (NYSE: IAU) of the trust is for the value of its shares to reflect, at any given time, the price of gold owned by the trust at that time, less the trust’s expenses and liabilities. The trust is not actively managed. It receives gold deposited with it in exchange for the creation of baskets of iShares, sells gold as necessary to cover the trust’s liabilities, and delivers gold in exchange for baskets of iShares surrendered to it for redemption. The trust is not an investment company registered under the Investment Company Act of 1940 or a commodity pool for purposes of the Commodity Exchange Act.
SHORT:
The investment ETF (NYSE: DZZ) seeks to replicate, net of expenses, twice the inverse of the daily performance of the Deutsche Bank Liquid Commodity index – Optimum Yield Gold Excess Return. The index is intended to reflect changes in the market value of certain gold futures contracts and is comprised of a single unfunded gold futures contract.
The investment ETF (NYSE: GLL) will seek to replicate, net of expenses, twice the inverse daily performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London. The fund normally invests assets in financial instruments with economic characteristics inverse to the index. It may employ leveraged investment techniques in seeking its investment objective.
Related posts:
- Gold Investing: Why Gold Tilts Towards A Short-Term Move Up (GLD, SLV, GDX, GDXJ, DZZ, GG)
- Silver Summit Report: Three Investment Approaches To The Volatile Metal (SLV, GLD, AGQ, ZSL, PSLV)
- Look For Gold To Move Much Higher Within The Europe Debacle (GLD, SLV, GDX, NEM, GG, IAU)
- Gold and Silver On The Verge Of A Big Move (GLD, SLV, UUP, SPY, PSLV, IAU)
- Get Ready As Gold & Stocks Are About To Move In Opposite Directions (GLD, SPY)
Most Comments