Investors are looking for a safe place to put their money – an asset class they can “touch” and possibly trade even when no organized marketplace exists. That of course is the worst-case scenario and I do not believe it will get that far but the possibility is there and gold seems to achieve peace of mind for investors at the moment. As such, for me, GLD would be the only stock or ETF I would buy if I could own just one. Words: 862
So says* Francisco Martin (fmmarketwatch.blogspot.com/)
At the beginning of this year I was expecting inflation to be an issue, but have changed my view quite a bit since then. I believe we have entered a deflationary cycle, which is very negative for equities overall and especially commodities. So how does gold fit into one’s overall investment approach?
The USD and Gold
Gold is usually a good asset class to hedge against a possible inflation and not necessarily viewed as an deflation hedge. I believe the safe-haven characteristics of the U.S. dollar and gold will actually produce positive returns for gold, even during a deflation.
Gold prices have in the past had inverse correlation to the dollar but we are currently in uncharted territory with an economy that is not only in shambles but very much globalized. We need to essentially rewrite our economics books to address the current economic situation.
I believe investors are currently deleveraging and de-risking their portfolios. The de-risking part is the driver for gold prices to move in tandem with the dollar. Investors are more interested in capital preservation than equity-like returns as seen in the past. My thesis is that the dollar and gold prices are moving in tandem because they are perceived as safe havens during an unknown future.
There aren’t many asset classes one can invest in and expect OK returns without incurring risk. Uncertainty is just too great for any investor to risk their hard-earned money, however, gold is a “real” asset that is portable and it holds an implied value. The SPDR Gold Trust (GLD) actually holds the bullion in a vault based in London, making it a great alternative to actually buying coins and/or gold bullion, which need to be held in a safe deposit box at a bank or in your house. In addition, while there are a number of gold ETFs, GLD is the largest and most liquid one and, therefore, is my preferred vehicle.
I am aware that GLD has come in for some criticism from those who say it doesn’t represent physical bars and that, despite its size, it is susceptible to price manipulation. In response I must emphasize that GLD is not a derivative. It is a trust that holds the equivalent value in gold bars. Since it is a financial instrument that holds gold and follows its price movements it will without a doubt sometimes either trade at a discount and/or premium but that is when savvy investors (mostly institutional) will arbitrage such price anomalies out of the ETF price.
Furthermore, manipulation is not an issue in my view. I don’t know how you could manipulate GLD any other way than you would a stock. Sure, you could disseminate rumors that gold is the new global currency; that surely would move the price, but other than that, I cannot imagine manipulation being an issue. The only negative would be that the ETF would make gold more accessible to the mass market and easier to buy, sell and hold and that could essentially create a greater demand and move prices higher. I believe prices on gold have moved higher because of instruments such as gold ETFs.
Catalysts That Could Move GLD Significantly
1. If China implodes, gold could reach new highs very rapidly.
2. Chinese banks are curbing lending, which could slow their growth and subsequently start a sell-off
3. The current developments in the eurozone are also very alarming and could ignite a gold rally, especially if Spain is not able to get their act together. Odds are against a quick resolution in Europe.
The only thing that could possibly go wrong for gold, in my opinion, is a dramatic global recovery and Europe getting back on their feet quickly. That could initiate a sell-off in gold. It is a possibility, but highly unlikely within the next 12 months.