Will there be a Gold Rush in 2009?
By Ron DeLegge, Editor
January 5, 2009
SAN DIEGO (ETFguide.com) – The Gold Rush of the 1850’s is 160 years removed from 2009, but gold’s luster appears to be firmly in tact.
In 2008, the price of this storied precious metal increased for the eighth consecutive year. The SPDR Gold Trust (NYSEArca: GLD), which tracks the bullion price of gold, recorded a 4.9% gain. While that may not sound like much, it’s substantial when given context. Gold’s 2008 gain was roughly 48 percentage points better than international stocks (NYSEArca: EFA), 43 points better than the S&P 500 (AMEX: SPY) and 39 points better than the Dow Jones Industrial Average (AMEX: DIA).
Despite an impressive finish, gold’s move in 2008 was a rollercoaster ride.
After breaking the $1,000 an ounce barrier during the spring, gold’s momentum hit a brick wall. Exchange-traded funds (ETFs) tracking the yellow metal subsequently declined around 20 percent into bear market territory before recovering at the year’s end. Gold’s wild trading range for the year was a high of $1,035 to a low of $681 per ounce.
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Besides being used as an investment and in jewelry design, gold is also used in the medical field to make drugs that treat rheumatoid arthritis and liver, eye and ear diseases. The field of dentistry has been using gold for years to fill cavities. Gold is also used for switches, relays, and connectors in producing electronics equipment.
One contributing factor to gold’s recent strength was the Federal Reserve’s decision to slash interest rates which set off a decline in the U.S. dollar. The value of the dollar versus competing currencies like the British Pound (NYSE: FXB), Japanese Yen (NYSE: FXY), and Euro (NYSE: FXE) has fallen around 10% over the past month.
A second factor is the U.S. government’s focus on fighting deflation, stimulating the economy, and calming the banking/credit crisis. Between, trillion dollar bailouts and President-elect Barack Obama’s plan to spend upwards of $1 trillion to spur economic activity, you’re probably wondering where is the money to pay for all of these things going to come from? Whether the public realizes it or not, these projects are already being financed by one of the government’s favorite methods: Printing more dollars. Increasing the money supply is destructive to the dollar and a bullish sign for gold.
One last factor is the unappetizing zero-percent yields on short-term U.S. Treasury Bills and the low yields on money market mutual funds net after fees. Even though gold pays no dividend or yield, people’s definition of “safety” is being tested like never before. Clearly, zero-percent yields are far from adequate buffers against the future risk of inflation.
Gold in 2009
Some analysts remain convinced that gold’s multi-year gains aren’t over. They argue that gold’s long-term fundamentals remain intact.
One of gold’s most outspoken advocates is James Turk. He’s called for gold prices to reach as high as $8,000 per ounce, which has led some observers to scoff at Turk’s forecast. True it may be a while before gold reaches those levels, but Turk was accurate in forecasting gold passing the $500 barrier in 2005.
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While the economic recession in the U.S. and the rest of the world along with banking/credit crisis hasn’t yet been the definitive recipe to drive gold prices to higher plateaus, any hints of re-inflation could be just the ticket.
During the mid-to-late 1970’s, surging inflation among other things was the primary driving force being gold’s bullish run. For those of us old enough to recall, it was inflation that was preceded by deflation. Remember the 1973-74 bear market in stocks? As Mark Twain eloquently alluded to, while history doesn’t necessarily repeat itself in the same manner, it often rhymes. If inflation is reignited, having exposure to gold should be a good way to profit.
Gold in Your Portfolio
Gold as part of a diversified portfolio is beneficial in that it can help to reduce volatility and gold ETFs are one of the easiest ways to obtain market exposure the metal. By just having a brokerage account, an investor can buy shares in whatever increments they desire. And here’s another advantage: Investors can avoid the additional expense and inconvenience of storing and insuring physical gold bars, coins, or jewelry. Gold ETFs like GLD and IAU keep their gold assets stored in secured vaults.
The ETF portfolios offered by ETFguide have successfully used gold ETFs over the past few years. In 2008, the Contrarian Fox portfolio had almost 30% exposure to GLD, which helped it to record its third consecutive year of outperforming the S&P 500.
Both GLD and IAU represent fractional ownership in gold. Their ETF share prices are designed to reflect one-tenth the per ounce price of gold bullion. Each fund charges annual expenses of 0.40 percent.
Another aspect of gold investing to consider is taxes.
Long-term gains made in gold are taxed as collectibles or at a maximum rate of 28 percent. This is a higher tax rate compared to gold equities. Also, investment products that utilize gold futures are typically taxed at a blended tax rate of 60/40 which amounts to a maximum rate of 23 percent.
Speaking of the Gold Rush in the 1850’s, historian H.W. Brands wrote, “The Gold Rush established a new template for the American dream. America had always been the land of promise, but never had the promise been so decidedly material.”
While the gold rush of the past may not become an exact replica of itself in the future, anything close should keep gold’s investors more than satisfied.
Below is an excerpt from the ETF Profit Strategy Newsletter – Published on Oct.21, 2008
At the time, the Dow was above 9,000. It dropped below 7,500 and rallied into Nov./Dec
Short-Term: published on Oct. 21, 2008