There’s been much fanfare made of gold breaking an all-time high in US Dollar terms, even though the dollar has declined precipitously against virtually every foreign currency (so it’s not really appreciating that much in terms of other global currencies), but the trend is your friend and if you’re a momentum trader or fear inflation and/or a collapsing greenback, the gold play is on. However, note that gold has only just barely breached the highs last seen during the Lehman collapse. Meanwhile, silver and platinum (metals with actual real-world utility) are skyrocketing. Since very few people reading this are interested in material possession of any of these metals and aren’t avid futures traders interested in rolling contracts and such, metals ETFs are the next best way to play the momentum in these metals. However, let’s also consider what’s really going in in gold, and then take a look at these other precious metals.
I never cease to be amazed by how shameless the media is in hyping fear, a trend, a fad or the demise of some once great personality or entity. I was listening to CNBC the other day and Becky Quick was gushing about the HUGE move in gold, how it was rocketing up during the current trading session. Gold was up less than 2% on the day! Going off on a harangue about spikes and momentum on a 1.8% move? It’s ridiculous. But, no doubt, many people were glued to their sets (or Satellite radios) waiting to hear why gold was “spiking” and what kind of ruinous disaster this portends for America. This is no different than the oil bubble last year or real estate prior to that. A trend drives the smart institutional money in first, then the hype hits main street, then the retail investors get in, then the smart money gets out, then main street gets slaughtered, then Congress holds hearings and grandstands trying to pretend to care about what happened.
Let’s take a look at the gold ETF GLD (the best proxy for gold price moves since the Trust actually holds real gold) pricing in terms of US Dollars. But, let’s also consider the performance of US equities (S&P500 ETF SPY) during the same time frames, and finally, some foreign currency ETFs since this is as much a weak dollar play as anything else – we’ll pick the Euro (FXE) and the Aussie dollar (FXA) since Australia is the first major economy to have the boldness to increase their interest rate to stave off inflation, citing the end of the economic crisis in their homeland. Finally, we’ll look at the Silver ETF SLV and the Platinum ETN PTM.
I had thought it would be instructive to take a look at the March lows when things looked REAL bad and see what kind of returns you could expect for panicked investors who pulled everything out of stocks and hid in gold, or worse – cash. Equities rallied 55% and note who the worst performer on the list is – Gold! A measly 11% return when virtually any other play would have yielded better results. Not to be accused of “cherry-picking” my timeframe and results, I’ve constructed the following table to take a comparative look over a few common recent timeframes to see if all the Hoopla over gold is warranted.
This table outlines the performance of these various instruments over the prior 1 month, 3 month and 1 year period. Aside from highlighting how GLD performed in contrast to these other instruments, I arbitrarily chose to average (a mean, not a median) the instruments and you’ll note that in no case did Gold outperform the bucket. Gold also didn’t look that hot next to Platinum or Silver – but you hear very little about them in the media.
Gold is Really Just a Weak Dollar Proxy
Take a look at the 3 month column so I can demonstrate my point. While Gold advanced 13%, the Aussie currency rose 13% against the US dollar as well. What this really means is that if you live in Australia, gold is at the same price now as it was 3 months ago.
Gold is not rising! This is the case in virtually every other country except the US.
In the prior 1 year period, gold is actually LOWER than it was a year ago in Australia. It’s not up much in Europe at all! And, if you’re trying to play the commodities/weak dollar/fear factor, instead of buying gold, why not just buy Silver or Platinum which are leveraged to gold as indicated by their historical and recent returns. Finally, if you want a pure play on what’s actually occurring and don’t want to hold a metal that has very little real-world utility, this article lists out several Currency ETFs and ways to play the demise of the US dollar should the trend continue. While the gold bugs have been dilly-dallying in their brittle obsession, many emerging market ETFs are up triple digits 2009 YTD!
While the CNBC pundits will point out that gold just reached an all-time high, in terms of global currencies, it’s nowhere near last year’s high.
There are, of course, leveraged ETFs for some of these precious metals (full list of all 2X, 3X ETFs), but given the value destruction in share price that occurs over time due to daily rebalancing, I don’t recommend these as anything other than a speculative near-term trade. And I use the word “recommend” loosely.
What are your thoughts? Are we being taken for a ride? Are you buying gold?
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