Think Gold ETFs As The Gold Bubble Forms (GLD, SGOL, UGL, GDX, GDXJ, DGP)

We continue to hear pundits describe gold as a bubble. Certainly it will turn into a bubble before this is all over but we are hardly in the bubble stage yet. In order for a bubble to form you need the public to come into an asset class. The public is pretty dim and it can take 15-20 years before they “catch on”. It took 18 before they noticed the tech bubble.

Once they do start to “get it” we will have about a year to a year and a half as gold enters the parabolic stage before the bubble pops. See the Nasdaq chart below from late 98 to March of 2000.

At gold’s top, half of your neighbors will be buying gold (not selling like they are doing now).

At the top there will be lines outside the the local coin dealer waiting for the next shipment of gold to come in.

At the top 7 of 10 billboards you see driving down the highway will have something to do with precious metals.

At the top the guy standing next to you in the grocery store will tell you how many thousands of dollars he made last month off his gold coins.

At the top everyone will have become convinced the dollar is toilet paper and will only continue to decline until it has become worthless.

At the top the population will believe that we have to go back on a gold standard. By the way, a gold standard never stopped any country from debasing its currency. In ancient Rome they clipped some of the gold out of the coins. Roosevelt confiscated and arbitrarily revalued gold in the 30’s. A gold standard will not prevent a government from trying to get something for nothing by debasing the currency.

At the top stocks will be universally hated and gold universally loved. In reality, stocks will at that time, represent true value. Much more so than a shiny metal with virtually no industrial uses.

At the top smart money will eventually come to their senses and realize that true value (profitable companies making the necessities for life on Earth) are being given away for pennies on the dollar to purchase a shiny metal that really has no intrinsic value.

Here is a chart of the Nasdaq followed by a chart of gold. You tell me, does gold look like a bubble yet?

 
Of course not! I think we might be getting close to the Nasdaq 1998 level, but gold is hardly in the runaway parabolic stage where it rallies over 100% in a year. Not to mention that none of the other signs I noted above are even remotely present yet.
 
But no one needs to worry about a bubble just yet. We need to have at least one more serious correction similar to what happened in `08 or in tech stocks in 1998 to wash out bullish sentiment before we can start the final parabolic run into a true bubble top.
 
If I had to guess I would say that will occur during the next liquidation event which should be due in mid to late 2012 as the stock market collapses down into the third leg of the secular bear market.
 
 
That should mark the next four year cycle low and possibly the nominal bottom for the secular bear market in stocks that began in March of 2000. I expect the selling pressure at that climactic event will also drag gold down into the correction that should separate the second phase (what gold has been in since early ’06) from the third and final bubble stage. Gold will quickly recover, like it did from the last selling climax, and when it does this is when we will see the public begin to panic into gold.
 
Then and only then can we start talking about a bubble.
 
At the moment I think we are about to enter the second leg of an ongoing C-wave advance that began in September of last year. I’m expecting this leg to take gold to the $1400-$1500 level before experiencing a major D-wave correction.
 
I’ll be monitoring the advance on a daily basis to keep subscribers appraised of where gold is in its intermediate cycle. When I think we are getting close to the top of the C-wave I’ll warn subscribers to take profits and exit the precious metals market so as not to get caught in a D-wave correction.
 
 
 

The most popular way to play gold is through ETFs and the biggest gold ETF is the SPDR Gold ETF (NYSE:GLD).  We have put together some details on the SPDR Gold ETF (NYSE:GLD) below for you to take a look at.
 

SPDR Gold Shares ETF (NYSE:GLD) 

SPDR Gold Shares offer investors an innovative, relatively cost efficient and secure way to access the gold market. SPDR Gold Shares are intended to offer investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell that interest through the trading of a security on a regulated stock exchange. The introduction of SPDR Gold Shares was intended to lower many of the barriers, such as access, custody, and transaction costs, that have prevented some investors from investing in gold. 

SPDR Gold Shares represent fractional, undivided beneficial ownership interests in the Trust, the sole assets of which are gold bullion, and, from time to time, cash. SPDR Gold Shares are intended to lower a large number of the barriers preventing investors from using gold as an asset allocation and trading tool. These barriers have included the logistics of buying, storing and insuring gold. In addition, certain pension funds and mutual funds do not or cannot hold physical commodities, such as gold, or the derivatives. 

Key Info

Name SPDR Gold Trust
Objective Designed to track the price of gold (net of Trust expenses)
Symbol GLD
Exchange New York Stock Exchange Arca
Initial Pricing Based on the price of 1/10th of an ounce of gold
Estimated Expense 0.40%*
Minimum Order Size 1 share
Sponsor World Gold Trust Services LLC
Trustee BNY Mellon Asset Servicing
Custodian HSBC Bank (USA)
Marketing Agent State Street Global Markets, LLC, an affiliate of State Street Global Advisors
Short Sale Eligible Yes
Margin Eligible Yes
Structure Continuously offered, open-ended investment trust

* The Sponsor and the Marketing Agent have agreed to reduce the fees payable to them from the assets of the Trust to the extent required so that the estimated ordinary expenses of the trust do not exceed an amount equal to 0.40% per annum of the daily net asset value during the period ending seven years from the date of the Trust Indenture or upon the earlier termination of the Marketing Agent Agreement. Investors should be aware that if the value of the Trust assets is less than approximately $388 million, the ordinary expenses of the Trust will be accrued at a rate greater than 0.40% per year of the daily ANAV of the Trust even after the Sponsor and the marketing Agent have completely reduced their combined fees of 0.30% per year of the daily ANAV of the Trust. This amount is based on the estimated ordinary expenses of the Trust. 


  

SPDR Gold Trust Advantages

Easily Accessible Listed on the NYSE Arca.
Secure The Gold Shares represent fractional, undivided interests in the Trust, the sole assets of which are physical gold bullion and, from time to time, cash.
Relatively Cost Effective For many investors, transaction costs related to the Gold Shares are expected to be lower than the costs associated with the purchase, storage, and insurance of gold bullion in a traditional gold bullion account.
Liquid Structure allows for baskets to be created and redeemed according to market demand, creating liquidity.
Transparent There exists a 24-hour global over-the counter market for gold bullion, which provides readily available market data. The price, holdings, and net asset value of Gold Shares, as well as market data for the overall gold bullion market, can be tracked daily at spdrgoldshares.com.
Flexible Gold Shares (NYSE Arca: GLD) are listed on the New York Stock Exchange Arca and trade the same way ordinary stocks do. It is possible to buy or sell Gold Shares continuously throughout the trading day on the exchange at prices established by the market. Additionally, it is possible to place market, limit and stop-loss orders of Gold Shares.

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. 

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