Gold And GLD Are Falling Out Of Bed


Gold prices have slipped 27 percent so far this year and assets in the bullion fund SPDR Gold Shares (NYSEArca:GLD) have fallen by almost half-suggesting the 12-year gold rally may be over and the stage may be set for smoother growth ahead if the mania to own gold that accompanied the worst downturn since the Great Depression has run its course.

There are plenty of strands to this story, the most crucial of which seems to be that the inflationary pressure so many thought would accompany the Federal Reserve's unprecedented easy-money policies of zero interest rates and "quantitative easing" has yet to materialize, essentially undercutting one of the main reasons investors own gold.

GLD, the world's biggest physical gold ETF, has suffered outflows of $18 billion this year, the latest of which was $667 million worth of redemptions on Tuesday, June 25, according to data compiled by IndexUniverse. The huge fund now has just under $40 billion after starting the year with more than $72 billion, an asset drop of 45 percent that's accelerating.

Gold prices are now at $1,222 a troy ounce, the lowest they've been since August 2010, and well off the cycle high of $1,921 in September 2011 that followed rancorous debates in Washington, D.C., over the "debt ceiling"; Standard & Poor's surprise downgrade of U.S. sovereign debt; and the unsettling spectacle of a debt-gorged eurozone in policy chaos.

Gold prices drifted sideways for some time after that upsetting period, but actually began to decouple from the Fed's "inflationary" policies in the fall of 2012, when the U.S. central bank launched so-called QE3-the $85 billion a month bond-buying program designed to keep borrowing rates low in an economy still scarred by the meltdown of 2008-2009.

"In the end, gold is a hedge against inflation, and QE hasn't resulted in any inflation," said Sumit Roy, a commodities analyst and managing editor of (HAI). Roy stressed that the lack of increased inflationary pressure in the wake of QE3, more than after the first two legs of bond buying, really caught the attention of the gold market.

It's been a more or less steady move downward in price and assets since then, though GLD-said to be held more by traders than other gold ETFs -has borne the brunt of the shift in investor sentiment. This year, GLD has lost 28 percent of its holdings in troy ounces, while all other gold ETFs have lost 12 percent. GLD makes up half of all the gold in ETFs.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , ETFs

Referenced Stocks: GLD



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