The Risk On/Risk Off Behind Gold

For months and even years, analysts have debated and speculated on whether gold is in a bubble and whether that bubble could be close to bursting. It’s also been written about time and again in the pages of Registered Rep. But the whipsaw we’ve been seeing between the SPDR Gold Shares ETF (GLD) and the SPDR S&P 500 ETF (SPY) just goes to show what volatile times we are in.

Over the last month, assets have flowed in and out of these two funds, as investors’ risk appetites have changed on a dime. Two weeks ago, GLD surpassed SPY as the largest ETF, with $76.67 billion in assets. But when gold prices fell, investors started pulling back on GLD and SPY took its top spot again.

As of Thursday, SPY had $88.94 billion in assets, while GLD had $71.83 billion as of Wednesday, according to Morningstar data.

But Robert Goldsborough, ETF analyst at Morningstar, says there’s no reason GLD couldn’t push SPY back down to number two again, if investors continue to be fearful. When the economy’s weak, investors turn more toward hard assets. “Nowhere is it written that SPY is, will be, and has to be the largest ETF.”

Here’s how the two ETFs compare, performance-wise (data from NASDAQ):

GLD_SPY_New

Even Friday morning, gold seemed to turn a corner, as prices were up 2.7 percent as of this posting. Gold ETFs benefited (from ETFTrends.com):

Gold exchange traded funds gained nearly 3% in premarket action Friday after the Labor Department said nonfarm payrolls were flat in August.

Tom Roseen, head of research services at Lipper, expects SPY to take a black eye next week in terms of asset flows, while GLD is expected to have a good run. Roseen says investors, particularly institutions and day traders, use these two funds as vehicles to get in and out of these markets opportunistically. They’re used as a short play to capitalize on these market swings. To get an idea for how much volatility we’re in for, just keep an eye on the VIX.

As for a gold bubble? Roseen says people have been talking about how gold’s run is going to stop since 2002. But as long as there’s volatility and currency concerns, people are going to use gold as a way to hold onto wealth.

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