Is the Honeymoon Over for Gold ETFs?

Is the Honeymoon Over for Gold ETFs?

Everybody knows the honeymoon period can’t always last forever. And a new ETF study suggests that RIAs were not as keen on gold ETFs in 2011 as they were in 2010. According to The 2012 ETF Outlook for Advisors by Charles Schwab & ETF Trends, asset inflows into gold ETFs dropped by more than half in 2011, while other precious metals ETFs saw outflows in 2011. While Schwab could not provide exact numbers, Morningstar confirmed that flows to commodities ETFs waned at the end of last year. In fact, the SPDR Gold Trust ETF (GLD), the largest gold ETF in terms of assets, lost $2.2 billion in assets in December, and saw $500 million in outflows for all of 2011, Morningstar said. Does this mean the precious metal is losing its shine?

Abraham Bailin, ETF analyst with Morningstar, would say certainly not. The fundamentals driving demand for gold have not changed, he said. Demand for gold is driven by market uncertainty and loose inflationary monetary policy. Have these things abated? No, Bailin says. We’ve not seen a return to a normal level of certainty in the marketplace.

From the Schwab/ETF Trends report:

Enthusiasm for gold ETFs waned in 2011, suggesting worries that the precious metal may be overvalued following its historic bull run. A stronger dollar in late 2011 also led to falling purchases of gold ETFs.

Bailin agreed that a weak Euro and strengthening dollar are main drivers that have led gold prices down recently. Gold tends to see parallel weakening when the dollar is strong because the market is looking at gold as a monetary equivalent. If we see some positive news come out of Europe, he would project at least directional interest in gold.

Adrian Day, president of Adrian Day Asset Management, an RIA in Annapolis, Md., said the waning interest in gold was probably related to the fact that hedge fund manager George Soros called a gold bubble near the end of last year and took all his assets out of the precious metal. In July and August, gold prices moved well above trend. “You know you’re due for a correction when that happens,” Day said.

Longer term, gold should get back to trend, Day says. The reasons people have been buying gold the last three years are still there, including that people don’t trust currencies, there’s a shaky banking system, and the U.S. budget deficit and European debt crisis are still unresolved, he said.

A possible gold bubble has long been debated, especially in the pages of Registered Rep. But Day doesn’t believe gold was a bubble or is a bubble because it doesn’t see exponential moves in price.


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