There was a time when Gold ETFs seemed unstoppable. They worked when the global economy hummed. They provided relative safety when the world economy collapsed. They hedged against inflation. Heck, they even appeared to hedge against deflation. And there were very few folks who benefited from bad-mouthing the yellow metal as the commodity ran from $850 an ounce up through $1900 an ounce.
It follows that, when the Fed double-downed on its commitment to electronic money creation for quantitative easing (QE) last September, one might have anticipated a surge in gold prices. Dollar devaluation has often led to spikes in alternatives to fiat currencies like SPDR Gold Trust (GLD) and iShares COMEX Gold Trust (IAU).
Something changed over the last year, however. Not only have gold ETFs been a drag on diversified portfolios, but their price movement have lined up with industrial metals. For example, SPDR Gold (GLD) has demonstrated a remarkably high correlation (.93) to iPath Copper (JJC) across a 12-month period. Industrial metals like copper have struggled for several years due to the global slowdown in economic growth, particularly in China.
On the other hand, useful metals like copper do not typically travel the same path as precious metals. The 3-year correlation coefficient between JJC and GLD is -.05. What’s more, prior to the start of 2012, these assets nearly demonstrated a strong inverse relationship, not a strong positive one.
Perhaps ironically, metals ETFs, resources-based stock ETFs and resources-based country ETFs all received a much-needed boost on Thursday, August 8, 2013. The reason? Chinese imports had surged nearly 11% from a year earlier. Stabilizing and/or improving demand from one of the world’s fastest growing economies is certainly capable of sendingÂ commodities skyward and resources-related stocks rocketing.
|Chinese Demand Improves The Prospects Of Materials and Metals ETFs|
|Approx 1 Day %|
|SPDR Metals & Mining (XME)||4.2%|
|ETFs Physical Platinum (PPLT)||3.7%|
|iShares MSCI Brazil (EWZ)||3.7%|
|iShares Silver Trust (SLV)||3.6%|
|iShares MSCI Chile (ECH)||3.3%|
|iShares MSCI Australia (EWA)||3.0%|
|iPath DJ Copper (JJC)||2.8%|
|iShares MSCI South Africa (EZA)||2.7%|
|iShares Global Materials (MXI)||2.5%|
|SPDR Gold Trust (GLD)||2.0%|
So here are several questions for the gold bugs as well as the naysayers. If the world economy were actually stabilizing — even improving — would a Gold ETF be more desirable or less desirable? Economic growth often coincides with inflation. And while gold will never be as “useful” as silver, platinum, copper or palladium, the Chinese have always coveted the shiny metal. What if the world economy continues to deteriorate, in spite of green shoots or a few positive data points? Economic uncertainty as well as unprecedented levels of monetary stimulus used to encourage inflows into Gold ETFs. And while gold has been moving in lock-step with industrial metals for a year or more, history has often treated precious metals differently.