Despite several attempts since late-2011 to get a rally going, the world’s most popular gold ETF — the SPDR Gold Trust ETF (GLD) — just can’t seem to shake itself out of its funk.
As they say, though, nothing lasts forever. The GLD ETF will rebound eventually. The question is, when?
Unfortunately, it doesn’t look like the gold ETF will get back on track anytime soon.
A Miserable Year for the Gold ETF
Although it’s not over yet, it’s close enough to the end of the year to say 2013 was nothing less than miserable for anyone who insisted on staying in a GLD ETF position.
The GLD ETF has fallen from a high of $164 in mid-January to a low of $114 in late June … a 30% setback. Since then, the gold ETF has bounced around, currently valued at $124 (up 8% from the mid-year low). The move barely makes a dent in the bigger downtrend, however, and as of the last look the bears were back in control.
When considering the cause of the not-so-insignificant weakness from the SPDR Gold ETF, there are a handful of related reasons to put on the table. The biggest three are:
- A lack of inflation: While the GLD ETF has been trending upward since its inception back in late-2004, the market turned up the heat on the gold ETF in early 2009 when the Federal Reserve started to flood the economy with cheap dollars in an effort to jump-starts its growth. See, cheap and easy money almost always fosters hyper-inflation. A funny thing happened on the way to soaring inflation, however … nothing. Though the annualized inflation rate peaked at an annual pace of 3.87% in September of 2011, in retrospect, that surge in inflation was only fueled by the comparisons to deflation (negative inflation) seen a couple of years earlier. Now that the economy and inflationary pressures have stabilized, the inflation rate has done well to hold above 1% … and the Fed’s still pumping away. Sorry, GLD ETF.
- Weak institutional demand: When gold was presumed to be headed for the stratosphere in 2009, it wasn’t just amateurs piling in. Central banks, fund companies (including the SPDR Gold ETF), and professional speculators all started to buy gold hand-over-fist. By so doing, they were creating the very rally they were expecting. Eventually though, the reason for buying gold in the first place — as a defense against inflation — had to materialize. When it hadn’t after three years of worrying about it, the market started to realize it probably wasn’t going to happen. That’s when the institutions started to scale back on the buying effort, and that effort is still deteriorating. For perspective, gold’s heaviest-ever consumption came in the third quarter of 2011, when all the world’s buyers purchased 1,219 tons of the stuff. It’s been falling since then, along with the value of the GLD ETF, hitting a multi-year low of 856 tons consumed in the second quarter of this year.
- A stable U.S. dollar: Because they’re priced in U.S. dollars (even for overseas investors), the price of gold fluctuates with the value of the greenback. If the dollar rises in value, gold usually loses value. If the sawbuck loses value, gold futures and the gold ETF increase in value. Sometimes gold futures get a little ahead of themselves as speculators try to predict where the U.S. dollar is headed, but by and large, gold is theoretically inversely linked to the dollar’s value. Problem: Though the GLD ETF rose in price from early-2009 through late-2011 on assumption the greenback was going to crater, the dollar barely budged during that time. In fact, the U.S. dollar index right now is right where it was in late 2007. Gold futures have given most of the exaggerated 2009-2011 gain back, but the equilibrium is still somewhere below where the gold ETF is priced. More than that, the U.S. dollar doesn’t appear to gearing up for any kind of major move in the near future.
The Bottom Line for the GLD ETF
Simply put, none of the big three drivers of the price of gold are in a position to apply any real bullish pressure on gold futures or the SPDR Gold ETF. If they were, we would have certainly seen the impact by now.
If anything, what little support for the GLD ETF that’s in place now is about to weaken. The Fed is looking for any excuse to begin tapering its cash-injecting stimulus, and once that flood of cash dries up, inflationary pressures could really evaporate.
That’s only going to exacerbate the institutions’ assumption that there’s no need to hedge against inflation. Meanwhile, since low inflation generally coincides with a stronger dollar, that could pull the value of gold down as well. Gold will do well to end 2014 above a price of $1180 per ounce.
And investors would do well to avoid the gold ETF for now.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.