Tuesday, March 19, 2013

Gold: Acting Accordingly

Is the bull market in gold over? That seems to be the most popular question I, and others, are asked these days. My simple answer is that gold and thus the SPDR Gold Shares (GLD) are acting accordingly. For the average investor that has been accumulating GLD over the last two years based on the return GLD provided the previous decade, I would tell them those types of returns are unrealistic to expect going forward.

Investors need to remember what fueled much of the move in gold. Many professional money managers and economist view gold as a currency. I absolutely agree with that categorization. The U.S. Dollar fell steadily throughout the last decade. The dollar’s weakness became such a hot topic that it became commonplace to hear European celebrities demand that they be paid in Euro’s for their services. Time and time again throughout the last decade Fed Chief Ben Bernanke was questioned about Fed policy in regards to the U.S. Dollar. As the dollar continued to lose value versus other currencies, Big Ben would continue to publicly state that a strong U.S. Dollar is in the best interest of our country. As the printing presses were set to maximum output the Eurozone crisis must have seemed like a gift from the Gods. As a result, the opinion of the U.S. Dollar has changed around the world. We appear to be one of the few countries that have our act together and thus demand for the greenback has increased.

Using GLD as a currency to offset a falling dollar has paid off really well. However, the data suggests that the easy money has been made, and GLD is acting accordingly with today’s economic environment. Let’s take a look at the historical performance of GLD versus UUP (the PowerShares DB US Dollar Index; an ETF that tracks the performance of the U.S. Dollar against a basket of currencies):

As of 3-18-13
5 Years
3 Years
1 Year
6 Months
3 Months

As you can see, GLD over the last five years has acted as a currency that trades inversely to the U.S. Dollar. The added benefit of owning gold over the last five years is that it also acts as a safe haven when the equity markets are experiencing periods of turmoil. You do not experience much more turmoil than the market collapse due to the mortgage crisis. A depressed dollar along with a plunge in equity markets and reduced gold supplies created the perfect party for gold. Today, the markets are roaring, the U.S. Dollar is rising, and with rising mining costs and ample supply, the miners can’t catch a bid. We may never see economic events align that perfectly for gold again and therefore those investors that are hoping GLD is their winning lottery ticket, may need to come up with a more realistic plan.

As an asset allocation strategist and fund manager I am glad that my position in GLD has not appreciated over the last twelve months. If it had risen in direct correlation with the equity markets, then that would defeat the purpose for me owning shares of GLD. I need an asset that will provide a hedge against a falling U.S. Dollar, and that will act as a safe haven when the equity markets fall sharply. That is exactly what GLD has done for me and without that disparity and lack of correlation between the two I would not have been able to achieve the historical returns I have enjoyed. Traders know why they are trading gold. I would suggest the average investor figure out why they own it and what it could possibly do for their portfolio.

Jon R. Orcutt is the founder of Allocation For Life, Author of The Allocation For Life Investment Newsletter, Author of "Master The Markets With Mutual Funds: A Common Sense Guide To Investing Success" and manager/creator of the AFL Models available to Allocation For Life subscribers at Folio Investing.