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Why Gold? Why Now?


Dylan asks:

“Any thoughts on the best physical gold ETF on the market?  What about one in US dollars…considering buying some gold ETF in US for both currency exposure and gold…still bullish on gold despite recent highs.”

Gee, why all the interest in Gold?

Could it be that most all markets, asset classes, regions, currencies and sectors continue to reach higher? (Gold included)?

Could it be the overwhelmingly bad headlines?

Inflation? High energy prices impacting consumers and causing food inflation? Less accommodating Central Bank policies? Housing bubble in China? Housing glut in the U.S.? Persistent U.S. unemployment? Ripple effect of tsunami-related shutdowns and delays? Euro / European Union sustainability? U.S. debt ceiling stalemate?

And, just for fun, here are just a couple of other things I’ve been thinking about:

Brazil’s yield curve has been inverted to two months. India’s yield curve is flat. An inverted yield curve is a precursor to a slowdown/recession.

I spoke with a bond trader early this week. She says it is getting tougher to do bond deals with International Banks. Bank liquidity is drying up. Gee, why would Banks be preserving capital? Didn’t that happen in late 2007, early 2008? Uh, oh.

Here are some thoughts from J.P. Morgan.

In the short-term, a lot of what happens to gold prices will reflect broad risk appetite and ETF positioning. Especially after a 35% increase over the last year, significant further upside for gold prices would likely need “new news” on issues such as the European peripheral countries or the U.S. fiscal outlook to push investors to seek more tail-risk insurance. That said, even should these issues resolve positively, we see downside for gold being relatively limited, for three main reasons. First, a reduction of market uncertainty should help economic growth, which in turn will support jewellery demand. Second, central banks are likely to be “buyers on dips” of gold, especially should prices moderate. Third, we believe other longer-term investor interest in commodities including gold is still in its early stages, again providing a measure of price support. Bottom line: for the foreseeable future, we see gold as likely to be range-bound at worst, and with risks biased higher.”

The urge to be contrarian is overwhelming, however …

“You have to be a bit careful with gold, because the price is pretty high,” said Jason Walker, senior manager with financial advisory firm AWD Chase de Vere.” Financial Post, Tuesday, May 19, 2009.

Gold was then trading just above US$900 an ounce.

I have no opinion on Gold except to say this …

I kinda’ think that any Canadian investor ‘is’ invested in Gold … by definition. 1/3rd of the S&P/TSX index is Materials and ½ of the Materials sector is Gold(s). Investors will participate … either way … whether they like it or not.

But you asked so here are a few Physical Gold options to consider. (The ‘best’ one? Due diligence, over to you, Dylan … but simple is usually better).

Oh, by the way, “Gold is often described as a poor investment for Canadians because it is priced in U. S. dollars yet moves inversely to the price of the U. S. dollar.” Richard Morrison, Financial Post, November 01, 2008

Physical Gold ETFs

SPDR Gold Shares GLD-N (active traders beware of the taxation issues).

iShares COMEX Gold Trust (IAU/AMEX).

The Canadian version of the IAU, is the iShares Trust COMEX Gold ETF USD, (IGT/TSX).

Central Fund of Canada Ltd. (CEFa/TSX), (a closed-end fund) splits its assets roughly 60% in gold and 40% in silver.

Central Gold Trust (GTU/AMEX).

Claymore Gold Bullion ETF (hedged &/or non-hedged)

Sprott Physical Gold Trust closed-end fund.

Sprott Physical Gold Bullion open-ended fund 

Bullion Management Group BMG Gold Bullion fund.

Horizons COMEX® Gold ETF (HUG)

Or, double your fun(d),

Horizons BetaPro COMEX® Gold Bullion Bull+ & Bear+ ETF (HBU / HBD)

Disclosure: I do not own any of the above ETFs and do not recommend the double leveraged ETF like HBU above.

Again, Due diligence? Over to you.

Gold ETFs have been written about extensively. Search the following:

Jan Harvey, Reuters
Richard Morrison, Financial Post
Alix Steel, Financial Post
David Pett, Financial Post
Kevin Grewal, TheStreet.com
Don Dion, TheStreet.com
 
Next time?
Risk Management.
Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan
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