Have Gold ETFs Lost Their Luster?

by on May 8, 2012 | ETFs Mentioned:

In recent years, gold has become arguably the most popular commodity from an investing perspective, and with good reason. Gold and the funds that track it have provided some massive returns for traders and investors all around the globe. But that popularity got especially heated in 2010 and the first half of 2011, as gold featured a meteoric rise to eclipse the $1,900 /oz. level with the financial world buzzing about what appeared to be the best investment at the time [see also Three Reasons Why Gold Is Overvalued].

It was because of this rise that gold became something of a speculative tool for traders, as they used it to hedge against equity losses. And for 2011, it worked quite well. Last year, the SPDR Gold Trust (GLD) featured a correlation of -0.64 to the S&P 500 partly due to the number of investors using it as a trading instrument. But recent months have seen that correlation fade as it now stands near 0. This is also the result of trading habits; traders and speculators seem to have gotten over their gold fever and have moved on to bigger and better opportunities [see also Does GLD Really Hold Gold, Or is it a Scam?].

Losing Steam

One of the main reasons why investors were so attracted to Gold ETFs in the first place was their stellar returns. GLD alone has appreciated by more than 140% in the trailing five years. This ETF peaked near the end of last year, as market volatility and an uncertain future pushed it to its historical high on August 29th. Since then, GLD has lobbed off more than 13% of its price and has struggled to offer the same returns that it has in recent years [see also Why No Investor Should Own GLD].

Returns
Ticker 2010 2011 *YTD
GLD 29.27% 9.57% 4.33%
SPY 15.02% 1.80% 11.24%
*As of 5/3/2012

The above table showcases GLD’s dominance over the S&P 500 ETF (SPY) in past years, but those figures have faded this year, as strong equities have taken the reigns. Though 2012 has been strong, many investors fear that we are due for a pullback in the coming months, as some data has begun to turn sour and markets have lost their upward momentum. If that were to happen, there’s no telling which way gold will head, but because it is regarded as one of the last safe havens left, it would not be a shock to watch gold jump on weak markets.

Gold ETFs and QE3

Of course, the above premise becomes almost entirely irrelevant if there is an announcement of a third quantitative easing program, as traders and investors will see it as a good sign for the future of gold and the asset will spike. If and when that happens, GLD’s (and similar gold ETFs) correlation figures will look completely different than they do right now as will its recent returns. But analysts have been calling for a QE3 for quite some time now, and while the Fed has not ruled it out, they certainly seem hesitant to pump more money into the economy. Bernanke’s recent comments suggest that if the economy begins to head south, he will ride to the rescue, but nothing is set in stone [see also Why Warren Buffett Hates Gold].

With a lagging performance and a loss in popularity as a speculative tool, it appears that gold ETFs have lost their shine for the time being. But with a hazy outlook on the future of our economy, there are a number of potential catalysts that could reverse that trend and put this precious metal right back on top.

Follow me on Twitter @JaredCummans

Disclosure: No positions at time of writing.