Markets

Gold ETF Performance & Outlook

By Christian Magoon

CEO, Magoon Capital

Gold ETF products tracking the price of gold gained around 2.5% last week. The successful - at least for now - second bailout of Greece helped gold prices rebound after fear over an impasse was proven to be unfounded. This was a relief rally for gold as it became clear this past Monday that Greek officials were able to satisfy European banking officials' austerity demands. Here's a performance chart of the largest gold ETF, GLD, clearly illustrating the rally that occurred on the Greek bailout news.

Source: StockCharts.com

The U.S. markets were closed on Monday the 20th for President's Day as the news hit, and thus the spike in the value of GLD was pronounced on Tuesday's market open. GLD continued its upward momentum Wednesday and slowed down on Thursday. Friday's release of stronger U.S. consumer data - likely combined with short term profit taking - pulled GLD downward by close to half of a percent. Here's the performance chart of all physical gold ETF products courtesy of GoldETFs.biz.

Physical gold ETFs had strong gains despite a negative end to the week.

From a technical standpoint, gold is slightly above its 200 day moving average. Here's a two year chart of GLD's 200 day moving average from stockcharts.com.

GLD is above its 200 day moving average but not dramatically.

Gold's rebound since the beginning of the year has been strong but relative to gold stock ETFs and U.S. stocks in general, gold does not appear too frothy. Here's the year to date comparison of the largest gold stock ETFs, GDX and GDXJ, the S&P 500 ETF, SPY, and GLD.

Gold stock ETFs are the outlier in 2012 with the best and worst performing non leveraged gold ETFs residing in this space. GDXJ, the Junior Gold Miners ETF, has sizzled after a 2011 fizzle. The most owned gold stock ETF, GDX, has been the worst gold ETF to own gaining just 5.2% this year. Here's the perfromance chart of all gold stock ETF products.

All gold stock ETFs are still negative over the last 12 months.

Of note is the Global X Pure Gold Miners ETF, GGGG, which has been gaining material performance ground versus GDXJ of late. This is an ETF to watch.

Gold appears to be well positioned going into the near future as central banks around the world are ready to introduce more liquidity into the financial system. In fact the story from this weekend's meeting of the G20 in Mexico appears to be the demands on Germany to step up its financial commitment to solving the EU debt crisis. Thus far Germany has intentionally focused on imposing austerity measures versus increasing bailout funding. Now that the non European G20 countries are being asked for money, the pressure is mounting on Germany to use its carrots and not just the stick. This means that more liquidity is likely to come - perhaps to the tune of trillions according to Reuters.

In addition, with tensions in Iran mounting, oil prices threatening global economic growth by spiking to $125 dollars and gold sentiment by fund managers the most bullish in five months, the price of gold appears to have a variety of catalysts that could send it upward to challenge the $2000 mark in short order.

In contrast, the primary risk to gold prices is a stronger U.S. dollar. As gold is primarily denominated in U.S. dollars, a stronger dollar means the value of gold would fall. This could happen quickly, as it did in late 2011, should the EU debt crisis begin to flare up. Germany's unwillingness to step up its financial commitment to the EU bailout would appear to be the most likely cause of a near term flare up in Europe, especially as a vote by German officials on the Greek bailout is expected to happen this Monday.

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


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

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