Buck The Crowd With These Gold ETFs

Tim Begany's picture

Tuesday, March 17, 2015 - 1:30pm

by Tim Begany

The past few years have been cruel to gold, a casualty of a relentless bull market in stocks and, more recently, the U.S. dollar.

Since October 2013, the price has plunged from nearly $1,800 an ounce to about $1,150 -- roughly a 35% drop.

The bear market in gold blindsided most precious metals investors. In the early days of the Great Recession, many were convinced that gold -- and not stocks -- had many years of big gains ahead. These gold bulls assumed that the Federal Reserve's massive "money printing" program would lead to runaway inflation.

Yet six years and three rounds of stimulus later, inflationary pressures remain non-existent.

This is why you may be surprised to hear that now could be the best time in a while to own the yellow metal. With the global economy in flux, there are several potential catalysts for substantially higher gold prices in 2015.

A Hamstrung Fed

After a long stretch of zero-rate policy, investors are finally realizing the Fed wants to start raising interest rates as soon as possible, maybe as early as June. This has been a headwind for gold recently, because higher rates would further boost an already bloated dollar, a key factor in gold's demise.

On the other hand, tightening monetary policy here in the United States, while central banks elsewhere are moving to ease up, could unleash dollar pressures that stall the U.S. economy. This would happen by making exports too costly and triggering a flood of much cheaper foreign imports. Even without Fed action, the strong dollar may limit S&P 500 earnings growth to just 3% and reduce GDP by as much as 40 basis points this year, analysts say.

So if the Fed sees signs of a meaningful slowdown in corporate earnings, GDP or other key economic indicators, it may opt to keep rates low for longer. By easing investor expectations for the dollar's strength, such a move could foster an environment conducive to higher gold prices.

A Need For Safety

Investors often seek out gold when they feel uncertain, and they're apt to feel that way a lot this year. The world's largest economies are in major transition, financial markets are unusually volatile and geopolitical turmoil abounds. And there are red flags most investors have never encountered before.

One of the most relevant for gold: negative bond yields.

As I pointed out earlier this month, negative-yields are common in European government bonds and they speak volumes about investor sentiment. The key takeaway: investors have so little faith in the region's economy that they'll pay to loan governments money, simply because governments often present the lowest default risks. Other types of investments are too daunting.

A third of all European bonds now carry negative yields, analysts estimate, and the phenomenon is likely to become even more widespread as the region's massive stimulus efforts progress. Along with concern that monetary stimulus will further devalue currencies, further proliferation of negative yields may scare investors into buying more gold, because of its safe-haven reputation and perceived value.  

Resurgent India, China Demand

Demand for gold from the world's two largest users, India and China, plunged last year, 14% and 38%, respectively, according to the World Gold Council. Those two countries account for half the world's gold consumption, and demand is being hit by reduced purchases for jewelry making and gold bought for investment purposes.

However, the decline in China wasn't as severe as the WGC statistics suggest. China's gold demand had much further to fall in 2014 following an unusually large buying spree the year before in response to lower gold price forecasts. Without that, the change might have been more in line with what India experienced last year.

Regardless, combined demand for the two countries is projected to spike about 10%-to-20% this year to 900-to-1,000 metric tons, with India likely showing slightly greater requirements. Recent data suggest the rebound is well underway, with China importing nearly 72 tons of gold from Hong Kong in January, up from about 59 tons in December. (Gold imports from Hong Kong are seen as a reliable proxy for gold demand in China.)

India imported just 25 tons of gold in February, but mainly because jewelers and investors delayed buying in anticipation of an import tariff rollback. Although the government unexpectedly kept the tariff in place, analysts say India will import 100 tons of gold this month to restock depleted inventory.

Risks To Consider: India is struggling with a current account deficit, where imports well exceed exports. To lessen the imbalance, the government has been taking steps to reign in imports, using measures such as the aforementioned gold tariff. A couple weeks ago, the Indian government announced that sovereign gold bonds were being developed as an alternative to physical gold. If overdone, measures like these could impede gold demand. So could persistently low inflation, since gold is often favored as an inflation hedge.

Action To Take --> India's sovereign gold bonds may not be available for a couple years, so it's too soon to say how they'll affect demand for gold. But some analysts are already saying the bonds won't make too much of a dent.

As for inflation, recent developments suggest that price pressures are building. For example, China saw a surprise spike in consumer prices last month, and most economists project gradually rising inflation in the United States (possibly beyond 2% this year). European Central Bank stimulus could soon spark higher prices across Europe.

On balance, gold could be one of 2015's surprise trades, with prices potentially revisiting late-January highs of around $1,300 sometime this year. Exchange-traded funds (ETFs), which hold physical gold, like the SPDR Gold Shares (NYSE: GLD) or the iShares Gold Trust (NYSE: IAU), provide a convenient way to participate. Investors seeking exposure through mining stocks might consider funds like the Global X Gold Explorers ETF (NYSE: GLDX) or the Market Vectors Gold Miners ETF (NYSE: GDX).

If you want the latest news on gold's rebound -- or oil and other natural resources for that matter -- then look no further than StreetAuthority's Scarcity & Real Wealth. Our resident natural resources expert Dave Forest has more than a decade's experience as a trained geologist and analyst. His industry insight allows him to read the markets and provide the most timely, potentially lucrative advice for everything from oil and gold to molybdenum. To gain access to Dave's latest research, click here.

Tim Begany does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.