A volatile beginning to 2015 is helping gold to regain some of its mojo. The U.S. stock market got off to a shaky start in January, and instability in currency markets initially lifted the price of gold bullion.
The SPDR Gold Shares (GLD) is already up around 7% year-to-date. Likewise, ETFs that leverage exposure to gold and related assets like the ProShares Ultra Gold ETF (UGL) and the Direxion Daily Gold Miners Bull 3x Shares (NUGT) have soared 14.6% and 72% respectively.
A swift decline in the euro and the recent move by the Swiss National Bank to end the cap on the franc are reminders that currency values can change dramatically. Will Denmark be forced off its krone peg to the euro as well? Amid recent currency ups and downs, gold looms as an alternative.
Although the global trend in monetary easing in Asia and Europe, with central banks buying up sovereign debt, has kept markets afloat, there’s still great interest by bankers in owning precious metals. Net purchases of 92.8 tonnes in Q3 2014 brought net purchases to 335 tonnes, slightly higher than the same period of 2013 (324 tonnes), according to the World Gold Council. Central bankers around the globe are still diversifying into gold.
Curiously, bankers’ enthusiasm for gold hasn’t been matched by investors. Despite central bank buying, demand for gold ETPs got progressively worse throughout 2014, falling 2.6% in Q1, 39.9% in Q2, and 41.3% in Q3. Why has gold sentiment been so negative?
“Since December 2012, gold’s relative strength momentum has been near the bottom of the universe we track made up of U.S. equity sectors, non-U.S. equities, bonds and real estate. In fact, gold has ranked dead last in 19 of the past 21 months,” said Gary Antonacci, author of “Dull Momentum Investing” (McGraw-Hill, 2014). “Given the high volatility and potential risks of the gold market, investors would do well to hold gold only when its relative strength momentum is strong or at least rising.”
Consider the relative performance of gold last year against major asset classes like stocks, bonds, and real estate. Only developed international stocks (VEA: –5.98%), commodities as a group (GCC: –11.05%) and bitcoin (–56%) performed worse than gold (–2.19%).
Regardless of gold’s underperformance in 2014, some advisors have used recent weakness in precious metals to strategically capitalize.
“Gold and silver are both interesting potential long-positions, but they can be extremely volatile at times. We traded silver (SLV, AGQ, USLV) recently, and quickly sold our position. We do not have any exposure to precious metals currently, but we are watching them both closely,” said David S. Kreinces, portfolio manager at ETF Portfolio Management in Thousand Oaks, California.
Aside from GLD, the largest gold ETP on the planet ($31 billion in AUM), there are other ways to obtain exposure to bullion.
The ETFS Physical Precious Metals Basket Shares (GLTR) offers a 4-in-1 solution by simultaneously holding exposure to physical gold, silver, platinum and palladium. GLTR eliminates the guesswork of deciding which among the precious metals will be the best performer by owning all four. Some advisors are using GLTR to maintain diversified core exposure to precious metals versus holding one metal.
The Market Vectors Gold Miners ETF (GDX) and Junior Miners (GDXJ) are two other ways to obtain exposure to gold, albeit in indirect exposure via mining stocks. Historically, mining stocks have been twice as volatile as gold itself. Despite the high volatility, some advisors choose equities because of more favorable tax treatment compared to gold’s 28% long-term capital gains rate.