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Time To Rethink A Gold Allocation?

By Pacific Park Financial Inc. (Gary Gordon)ETFsApr 16, 2015 12:15AM ET
www.investing.com/analysis/is-it-time-to-rethink-an-allocation-to-gold-248580
Time To Rethink A Gold Allocation?
By Pacific Park Financial Inc. (Gary Gordon)   |  Apr 16, 2015 12:15AM ET
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Many investors have given up on the idea that gold merits consideration in their portfolios due to years of depreciation in the dollar price of the yellow metal. For one thing, the SPDR Gold Trust (ARCA:GLD) is still reeling from 35% bear market losses since the heyday of 2011’s euro-zone crisis. Similarly, sharp increases in the value of GLD shares at the start of 2014 and 2015 were both met with vicious selling pressure and, eventually, more declines.

GLD Daily 2013-2015
GLD Daily 2013-2015

Perhaps ironically, investors who lack trust in European banks have not given up on gold entirely. In fact, over the last six months, gold denominated in euros has catapulted nearly 16%. Investors interested in capturing the uptrend that began with the official announcement of European quantitative easing (QE) may want to look at the AdvisorShares Gartman Gold/Euro ETF (Arca:GEUR). Note: The average daily dollar volume of $550,000 may be a turn-off for more active traders.

Gold:XEU Daily
Gold:XEU Daily

Yet before one gives up entirely on the prospect of owning gold in dollars via GLD, consider what negative bond yields in Europe are communicating. The markets, albeit manipulated by central bank intervention, guarantee that you will lose money by holding 5-Year German or 5-Year Swiss government bonds to maturity. The yields are -0.15% and -0.45% respectively. On the other hand, holding an instrument with a negligible loss might be a viable method for avoiding a fragile banking system.

Am I saying that European banks are broke? I can’t say that. I can say, however, that the European Union’s law forbidding taxpayer bank bailouts goes into effect at the start of 2016. When people consider the new law alongside the recent past (i.e., depositors losing 1/2 of their money in Cyprus banks) and the not-too-distant future (i.e., Austria ends government insurance for bank deposits in July), one can see why currency proxies like gold may start to shine.

There are other reasons why gold can recapture the public’s imagination. It tends to outperform other assets when fears of deflation become pronounced. High profile gurus such as Jeffrey Gundlach contend that the prospect of ever-falling prices is pushing investors toward accepting a small loss on government bonds. If investors are as worried about a deflationary spiral spreading across Europe, in spite of central bank stimulus efforts, they might also be attracted to the perceived safety of the world’s most renowned precious metal.

Granted, the greenback is the currency superstar for the time being. Its strength makes it difficult for GLD to gain significant traction. On the other hand, if data for the U.S. economy continues to miss expectations as we get deeper into May and June – if the notion of a temporary bump in the 2015 road gives way to signs of widespread deceleration – GLD would get a bona fide lift.

One way to assess whether or not gold (in dollars) has any legs is to track the SPDR Gold Trust (GLD):PowerShares Dollar Bullish (NYSE:UUP). price ratio. If GLD:UUP can break above and stay above an intermediate-term 100-day average, I’d have greater confidence in the precious metal’s ability to outperform competing asset classes like stocks.

GLD:UUP Price Ratio -  6 Month View
GLD:UUP Price Ratio - 6 Month View

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

Time To Rethink A Gold Allocation?
 

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Time To Rethink A Gold Allocation?

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Comments (2)
Patrick Souther
Patrick Souther Apr 16, 2015 1:26PM ET
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There was also a well documented visit by CNBC's Bob Pisani to GLD's gold vault. This visit was organized by GLD's management to prove the existence of GLD's gold but the gold bar held up by Mr. Pisani had the serial number ZJ6752 which did not appear on the most recent bar list at that time. It was later discovered that this "GLD" bar was actually owned by ETF Securities. I've always suspected GLD of gold hypothecation but saw no real evidence until that visit. The lack of insurance is also incredibly convenient for bullion lending.
Patrick Souther
Patrick Souther Apr 16, 2015 1:25PM ET
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Gary, you seem particularly familiar with GLD. Would you happen to know any specifics on GLD's insurance situation? I found the following statement to be quite informative: "Did anyone try calling the GLD hotline in search of numerical details on GLD's insurance? The prospectus vaguely states "The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate which does not cover the full amount of gold held in custody." When I called asking for clarification on this clause and about how much of the gold was insured, the representative proceeded act as if he didn't know and said they were just the "marketing agent" for GLD. What kind of marketing agent doesn't know such basic information about a product they are marketing? It seems like they are deliberately hiding information from investors."
 
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