Have Faith in Yellow Metal

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The sixth largest exchange traded fund in the United States, SPDR Gold Trust (NYSEMKT: GLD), follows 1/10th of price of one ounce of gold. SPDR Gold Shares is also among the top ten largest holders of gold in the world. As of Feb. 29, the ETF has given a YTD loss of almost 11% to its investors. Talking about other ETFs that follow gold prices, Market Vectors Gold Miners (NYSEMKT: GDX) tracks the price of gold plus the yield performance of NYSE Arca Gold Miners. Due to the recent decline of gold prices, GDX’s YTD loss stands at almost 48%. On the other hand, the Market Vectors Junior Gold Miners ETF (NYSEMKT: GDXJ) follows the price and yield performance of Market Vectors Junior Gold Miners’ index. GDXJ has yielded a YTD loss of 74% to its investors.

Now, the million dollar question is what’s in store for these ETFs and gold prices in the coming years? The answer appears to be a complicated one. However, I still remain bullish about this precious metal in the long run—the reasons are discussed below.

Continuation of QE3 Program

The U.S. economy shrunk by 0.1% in 4Q12, which was the first time in more than three and a half years. With the budget deficit hovering around $1 trillion, the odds of Fed discontinuing its QE3 plan looks highly unlikely. However, as costs related to buying more debt from the market keep on increasing, Fed might lower its monthly target of buying $85 billion worth of assets. Otherwise, with no asset buying program on the cards, the U.S. economy could face another economic recession.

With the QE3 program staying, money supply is bound to go up, creating inflation in the long run. With inflation on the cards, people would hedge themselves through gold and fuel its prices.

Fed’s Latest Comments on the U.S. Economy

Federal Reserve’s Chairman, Ben Bernanke has recently defended the low interest rate policies of the central bank. According to the Chairman, the recent bond purchases are essential in lowering the interest rates, which in turn will stimulate growth. Moreover, because of these low interest rates, people have been able to get auto loans and mortgages at cheaper costs. The chairman didn’t give any indication about discontinuing the QE3 program.

Emerging Markets

As the world’s major countries battle with the economic downturn, the developing countries are bound to get affected. During the past few years, hedging with gold during the economic downturn has been the norm in most of the emerging economies. In the future as well, people in these economies would continue to hold significant amount of gold in their portfolio, driving the gold prices up.

US Dollar Index

After Fed’s minutes of its last meeting, the US dollar rose against major currencies and the US dollar index reached a 5 month high. But the question is that is it sustainable? The answer might well be “no.” With Fed’s latest comments on the U.S. economy, the possibility of discontinuing the open-ended monetary easing looks a remote possibility. Thus, the US dollar index should go down after Fed’s next meeting, fueling the gold prices.  

Conclusion

At the moment, the price of gold is hanging around $1580. As the U.S. economy still faces risk of another recession, the QE3 program doesn’t seem to be going away. But, after the recent minutes by Fed, it looks that the excessive asset buying program would be reduced. As of now, the US dollar index seems to remain strong while the gold prices are expected to remain low till Fed’s next minutes. Till then, the gold ETFs are expected to remain slightly low. After that, these ETFs would see a steady upside as the US dollar index is expected to keep low as a result of increase in the money supply. As money supply increases in the economy, people are expected to hedge themselves through gold. Therefore, I still remain bullish about gold in the long run. Plus, at such a low price, this is the best time to buy gold for long term gains.


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