Missing a Golden Opportunity? (GLD, IAU, EWA, XME)
30 June 2007 at 6:12 pm by Gary Gordon
In a recent analysis by Biman Mukherji and Atul Prakash for Reuters India, the authors note the following: (1) India is the world’s top gold consumer, garnering one-fifth of the word’s supply, (2) Indian investors have… by-and-large… yet to accept the ETF vehicle as a method for owning the metal, and (3) Once Indian investors overcome cultural barriers, the desire to own gold physically should give way to a desire to own gold ETFs.
The facts here are plentiful. India loves gold. Indians feel more secure with owning gold outright, rather than in a brokerage account. And… it may take some time before a switch to ETF ownership of gold is acceptable to the citizens of India.
What’s missing from the analysis is the broader implication for investors around the globe; that is, regardless of the method of ownership, demand for the metal by India and China is growing as rapidly as their respective economies. And if demand outpaces supply… the price of gold should climb.
It is interesting to note that the spot price of gold has been languishing near the US $650 per ounce level for the better part of 3 months. And it hasn’t made a serious run at new highs since it hit $730 per ounce more than a year ago.
That said, in an earlier post, I gave a variety of reasons for investors to consider owning a small portion of the streetTRACKS Gold Shares (GLD) or the iShares COMEX Gold Trust (IAU). The most popular of precious metals is commonly considered a strong hedge against inflation. The gold ETFs have a very low correlation to the broader equity markets, providing greater diversification in one’s portfolio. What’s more, the less faith that investors around the globe have in currencies like the U.S. dollar, the more they tend to gravitate towards gold. (It’s hard to dismiss the U.S. dollar’s 7+ year depreciation against a variety of world currencies.)
Still, it seems that the number one reason for owning the streetTRACKS Gold Shares (GLD) and the iShares COMEX Gold Trust (IAU) may be simple supply and demand. China and India represent 40% of the world’s population, and the commodity boom has not forgotten precious metals like gold.
I have yet to find myself recommending an outright position in the metal alone. My clients have profited through exposure to sectors like the S&P Metals and Mining Fund (XME) and commodity-rich countries like Australia (i.e., the iShares MSCI Australia index EWA).
Nevertheless, streetTRACKS Gold Shares (GLD) and the iShares COMEX Gold Trust (IAU) seem to be at a technical crossroad. Each rests on its long-term moving average, and for some, this means gold could be on the verge of a major breakout. The only question is… will it be to the upside or the downside?
