Gold ETFs Still Shine in a Diverse Portfolio
According to some analysts, gold may hold the bulk of this run into 2012
Gold's appeal as a "safe" investment relative to a weaker dollar and battered global stocks lands the metal in record territory, up some 32 percent so far in 2011.
By contrast, global stocks are at their lowest in more than a year.
Factors that could keep gold's price elevated include ongoing struggles to fix European and U.S. debt burdens and signs that the global economic recovery has hit a rough patch worrisome enough to keep ultra-low interest rates in place. Investors tend to flock to gold as the dollar weakens, making "hard" currencies more attractive. Investors may also be betting that inflation, which eats away at the value of other assets, will eventually become a problem to reckon with.
"Fears about sovereign defaults and currency debasement have left many investors concerned about switching from equities into government bonds, and cash hardly looks an attractive alternative when real rates are negative. Gold has therefore been the main beneficiary of all these concerns,"
This surge in gold demand makes it difficult to determine whether the precious metal's price -- already over
"Successfully timing a short-run gold investment is not an easy task," says
According to some analysts, gold may hold the bulk of this run into 2012; at least three major investment banks hiked their price forecasts in August, though some do expect gold to pull back from what they see as current highly speculative levels.
"We think gold has enough momentum currently to travel north of
Citi pegs its 2011 forecast for spot gold to
All that glitters.Retail investors largely get their exposure to gold through exchange-traded funds (ETFs). After all, it's much easier to send and store electronic trading information than heavy bricks of gold bullion. Plus, futures markets are largely dominated by large institutional investors or corporate participants. Coins can be a fun and fiscally prudent alternative, and investing volume in this category is up sharply as well, but transaction, storage, and insurance costs must be taken into consideration.
In late summer, the SPDR Gold Shares ETF (symbol GLD), passed the popular SPDR S&P 500 (SPY) to become the largest ETF measured by net assets. Net assets in the gold fund around mid-August were
The factors behind that demand may remain in place.
Recent weak U.S. economic data raise the possibility of more help from the Federal Reserve in the form of more quantitative-easing programs that will make borrowing costs, and the dollar, remain historically low.
Continued demand for the yellow metal from the likes of Russian and Mexican central banks or for gold's increased role as a global financial system benchmark could keep upward pressure on prices. Plus, signs of inflation risk in
Even with those factors, gold investing warrants caution. Futures exchanges have demanded greater margin requirements, which reduced gold demand, at least on a short-term basis.
Volatility is likely.
For instance, gold pulled off its record in early September, tracking the currency markets. The Swiss franc fell the most ever against the euro after the Swiss central bank imposed a cap on the currency's exchange rate. Investors sold bullion to make up for their losses in the franc.
Still, there are benefits in diversification. Commodities like gold are generally uncorrelated to the movements of stocks and bonds. Unlike paper currencies, gold is not at the mercy of government policy. Because it cannot be easily issued or mined, its value won't decrease overnight as a currency might if the government were to significantly expand the monetary base.
"The Federal Reserve will eventually be forced to put on the brakes and mop up this liquidity through higher interest rates, but it isn't the most pressing concern. The Fed has no choice but to do all it can to preserve stability of our financial markets and worry later about the consequences of its policy," says
Insurance comes in many forms.
Investors who are nervous that gold's price has gotten too steep might find diversification in other commodities less susceptible to financial factors -- those with consistent demand such as food or those with inelastic supply that can't easily expand to fulfill spikes in demand, including coffee and cocoa, or in metals, which have restricted supplies.
Here's a look at some of the leading gold ETFs:
SPDR Gold Shares ETF (GLD) is trading above
The highly leveraged ProShares Ultra Gold (UGL) logs gains double the price of gold -- and doubles the downside.
Investors might also opt for broader commodities funds to gain some exposure to gold. iPath Dow Jones-AIG Commodities exchange-traded note (ETN), which uses the ticker DJP, is one such option. DJP tracks the futures contracts of 19 different commodities in the energy, agricultural, livestock, and metals spaces for a 0.75 percent annual fee. The ETN structure does leave investors exposed to credit risks.
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