Have We Seen the Bottom in Gold ETFs?


The last few months have been terrible for gold ETFs. Prices have plummeted for precious metals as investors have been much more willing to take on risk, while outflows out of these products have been enormous as well.

By some estimates, the ultra-popular GLD has seen more than $4 billion in outflows during the year-to-date period, including $2.55 billion in the past week alone. While this might not seem like a huge number, investors should note that this is nearly five times greater than the 2nd biggest outflow for the time period (FXI), and that it is in sharp contrast to broad stock ETFs in the same time frame (see A Technical Perspective on Gold ETFs). 

Given these outflows and how optimistic many have become over the economy in the medium run, gold ETFs’ appeal could be dulled for quite some time. This could be especially true if European woes make investors flee to the dollar, further curtailing gold demand.

However, while investors may be bearish on gold right now, Ben Bernanke and company could rekindle some lost demand for this precious metal and other hard assets. Thanks to his recent testimony in the Monetary Policy Report to Congress, many are now rethinking their bearishness on gold.

In the testimony, the central bank chief declared that asset purchases were not going away anytime soon and that they have clear benefits in today’s economic environment. Bernanke also put his weight behind stimulus programs that are taking place in Japan, while cautioning sequester spending cuts back at home (read The Comprehensive Guide to Gold ETF Investing).

This suggested to many that a dovish tone would continue to be the game plan for the Fed, and that accommodative policies would remain in place. “The bottom line is that it is QE3 until the job markets improve substantially,” said Sal Guatieri, senior economist at BMO Capital Markets in a MarketWatch article.

The definitive push by Bernanke to keep the status quo intact seemed to be a sharp rebuke of the latest Fed minutes. These notes suggested that there was a big divergence about the policy of QE which has led many to believe that QE’s days were numbered.

This no longer seems to be the case though as investors are now zeroing in on Bernanke’s lack of worry over continued QE. The absence of concern has pushed some to look once again at precious metal ETFs as a safe haven in this current environment of monetary easing and ongoing political worries.

The result was one of the best days for gold ETFs and gold miners in recent trading, with most products adding more than 1% on the day. GLD and IAU both gained about 1.25% on the session, while mining ETFs like GDX also added a similar amount for the trading period (also read Gold ETFs Meet Covered Calls in Brand New GLDI).

Admittedly, this isn’t a huge increase, but when one looks at the chart, it does look quite promising in terms of a bottom forming:   

Clearly there has been a recent bout of volatility in the space, as represented by the widening of the bands, but GLD has largely come back from its trough around the $150/share level. Since that point, the top gold ETF has added almost $6/share and is arguably back on track.

Currently we have a Zacks ETF Rank of 2 or ‘buy’ for GLD and IAU so we are looking for some strength in both of these over the long term as 2013 progresses. While this hasn’t been the case so far thanks to a robust economy and broad risk off trading, there could be a reversal as we push into March (read Palladium and Platinum ETFs to Soar?).

Investors are starting to worry over Europe again, and the sequester isn’t helping matters at home. Since Bernanke clearly isn’t too worried about QE, some investors could cycle into GLD and other gold ETFs for the time being, suggesting that this may be a bottom for precious metals in the near term.

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Follow @Eric Dutram on Twitter

Author is long IAU and gold bullion.

Read the analyst report on GLD

Read the analyst report on IAU

Read the analyst report on GDX

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