Gold ETFs: Is the Sell-Off Overdone?

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Over the past year, Gold ETFs have played a very important role in shielding the investors from stock market volatility arising out of the economic issues from both sides of the Atlantic as well as a marked slowdown in the emerging market equity space.

However, over the past couple of months, the yellow metal has been facing downward pressure in price. This has been especially true in the past few trading sessions where it has been faced a major sell-off (read Forget US REITs, China Real Estate ETF is Booming).

The SPDR Gold Trust (GLD) with an asset base of around $72 billion and an average daily volume of around 9 million shares is by far the most popular and most liquid Gold ETF available. Therefore its prices can be used as a good proxy to denote the prices of spot gold prices. The following chart shows the six months daily price movement of GLD.

Gold is amidst a very strong short term technical downtrend as indicated by the chart above. The ETF has been forming bearish patterns over the past few months.

First, it formed an inverted cup and handle pattern and after which the ETF has been seen forming a head and shoulders pattern which is also characterized by a breakout of the neckline (see Mining ETFs Surge on Fed Decision).

The $160 level is the immediate support level for the ETF and should be treaded with caution. This is followed by $155 level which previously was a support.

A breakout of this level will be characterized by a further steep decline. GLD is trading below its 50, 100 as well as 200 DMA line which also signifies a strong downtrend for the ETF.

However, the ETF is trading at a Relative Strength Index (:RSI) value of 30.61 which implies that it is trending near the oversold territory (circled portion). Therefore, it may witness an upward price movement in the following few trading sessions. However, it will only be a minor technical adjustment rather than a trend reversal.

Fundamental Factors

It is true that gold was expected to gain the most, after the announcement of QE3 as the Fed’s latest easy money program was expected to make Gold the safer safe haven, especially considering the ultra low yields in the Treasury bond market (read ETFs in a QE3 World).

Up to a certain extent it did happen. Gold prices soared and so did the prices of Gold ETFs during mid-September, at least right after the announcement of the easing. However, the trend was very short lived as it was soon followed by a strong correction.

Adding to the woes of the yellow metal was a weak consumption demand from economies like India and China. This is especially disappointing as the festival season in India has just concluded and the nation’s demand for gold is counted upon as one of the major fundamental price drivers.

However, it is not yet time to completely write-off the yellow metal and its ETF followers. While it is true that gold has been witnessing a very steep decline in the recent sell-off, it is also true that the precious metal is on the verge of closing the year on positive territory just like it has in the past few years and also on a multi-year high after steadily climbing up for a few years.

Also, the upcoming domestic as well as global events make it likely that the yellow metal to bounce back strong in the coming year. For instance, it we finally do manage to fall off the fiscal cliff, equities will have a tough time coming up to the lofty levels it has maintained throughout the year (see Defensive Sector ETFs for the Fiscal Cliff).

This will be favorable for gold investors since the investment demand for gold will increase as it is expected to be the new safe haven. Also, effective next year, the economy will experience an additional $45 billion of fresh money per month in the bond markets, setting the magnitude of the total monetary easing per month at $85 billion.

While this is primarily aimed at reducing unemployment levels to 6.5% until inflation reaches 2.5%, it will also cause the U.S. dollar to lose value and at the same time bring Treasury rates even lower (read Currency Hedged ETFs: Top International Picks?). Also, the full effects of the monetary easing which was announced in September of 2012 will be witnessed in the coming fiscal. All these are pretty optimistic circumstances for Gold.

ETF Choices

However, it is still difficult to comment if Gold will reach at or near its high levels anytime soon this fiscal, especially given the recent pessimism surrounding the yellow metal. Nevertheless, investors seeking exposure in the commodity could try the following ETFs:

SPDR Gold Trust (GLD) charges investors 40 basis points in fees and expenses and is one of the biggest ETFs in terms of total assets. The ETF tracks the spot price of gold, by taking exposure in gold bullions as opposed to future contracts.

The ETF is up by 5.50% year-to-date. It just has a mere 9% correlation with the S&P 500. GLD has a Zacks Rank of 3 or ‘Hold.’

PowerShares DB Gold ETF (DGL) was launched in January of 2007 and tracks the DBIQ Optimum Yield Gold Index Excess Return, which tracks the performance of gold by taking exposure in gold future contracts.

DGL has an asset base of $512 million and on an average does a daily volume of 73,000 shares. However, the ETF charges a hefty expense ratio of 75 basis points which might be a bit too much for investors.

DGL has a Zacks Rank of 3 or ‘Hold.’ The ETF is up by 4.19% year-to-date and has an 8.87% correlation with U.S equities (see Comprehensive Guide to U.S. Junk Bond ETF Investing).

iShares Gold Trust (IAU) also tracks the spot price of gold by taking exposure in gold bullion. However, the ETF has a strategic advantage over other competitors on the expense front.

It charges just 25 basis points in fees and expenses. It has an asset base of around $1.50 billion and an average daily volume of around 5.9 million shares (see more in the Zacks ETF Center).

The ETF has returned 5.56% year-to-date and has earned a Zacks Rank of 3 or ‘Hold.’ It has an 8% correlation with U.S equities.

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