An Update for GLD Traders: Gold Moves from Here

07/07/2010 12:01 am EST

Focus: ETFS

While global stock markets struggle with mixed economic news and conflicting technical indicators, one asset class has been in a streaking uptrend and that is gold.

Variously viewed as “the barbarous relic” or the new world currency, gold is captivating investors’ attention as it has for thousands of years.

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Above is a chart of the SPDR Gold Trust Shares ETF (GLD), and you can see how it has been in a steady uptrend since this time last year. And you can also see how it took a huge correction in last week’s trading.

Gold bugs say that gold has far to run and could reach $5,000 or more in response to either runaway inflation or global financial collapse, while doubters argue that it’s a bubble about to pop like all bubbles do.

Fans of gold say that it can only go higher. They say this because if inflation is the result of current monetary policies, then the dollar will decline while gold will skyrocket, and if financial collapse is the eventual outcome of today’s policy, then gold will be the currency of last resort and will soar in value.

Furthermore, demand for gold is still strong worldwide as not only retail investors, but also central governments buy gold including those of countries like Russia and China.

Russia is increasing its gold reserves by more than $6 billion this year, while China is on a gold-buying binge and has even recommended that its citizens buy gold.

If you are a gold bull and want exposure to gold in your portfolio, you can join many other investors through the use of exchange traded funds (ETFs).

The largest bullish ETF for gold is GLD, the SPDR Gold Trust outlined in the chart above. GLD actually owns gold and is the sixth largest holder of gold in the world, bigger than many countries, with 1300 tons in its inventory. It is designed to replicate the performance of the price changes of gold bullion and so it will move up or down as the price of gold fluctuates. GLD has assets in excess of $50 billion and has grown by more than 30% year to date.

The other interesting thing about GLD is that it is currently the second largest ETF in the world, just behind SPY, the first ETF in the United States and still the largest ETF in the world. 

However, with continued fund outflows from traditional stock market ETFs this year and concurrent inflows into GLD and other commodity ETFs, it’s quite likely that GLD will soon become the world’s largest exchange traded fund.  So if you want to own GLD, you will likely have lots of company.

Gold is clearly in a strong uptrend, although the chart above would indicate that it’s reaching short-term overbought levels and could be due for a correction or sideways action over the short term.

However, regardless of what happens to the price of gold over the long or short term, the most shocking fact is that a specialty ETF focusing on a single commodity could soon become the largest ETF in the world. That is a truly amazing possibility and one that reflects the most unusual times in which we live.

By John Nyaradi of Wall Street Sector Selector

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