After having tarnished its reputation as a safe-haven asset, gold has regained its luster as an investment. The gold price gained 14% so far this year and outshines the stock market, which has flatlined. Shares of gold mining companies have vaulted to the top of the leaderboard, a stark rebound after losing more than half their value last year. However, market experts are warning investors to not chase the yellow metal as they’re not convinced it will continue shining.
SPDR Gold Shares (GLD) , the largest exchange traded fund physically backed by gold, has rallied 14% year to date, after melting down 28% in 2013. Silver, known as the poor man’s gold, climbed 9% year to date. The white metal tracked by iShares Silver Trust ETF (SLV) was hammered 36% last year.
Gold bullion ended at $1,383 an ounce, a six-month high, in New York trading Friday. Silver ended at $21.46 an ounce. Investors may be buying gold as a safe-haven asset amid the geopolitical conflict in the Ukraine and Russia or fear of economic uncertainty, especially in emerging markets.
“(It) Looks a like a lot of safe-haven buying,” said Janice Dorn, a gold trader and trading psychiatrist in Phoenix and author of Mind, Money & Markets. “I am not convinced of this upmove. There is too much bullish about gold. But it is likely we have seen the bottom for the year.”
When investors are overly bullish, it is neon sign to run away as the crowd is usually wrong. Gold seems to be trading places with the stock market this year. The SPDR S&P 500 ETF (SPY), with 500 well-known companies, is nearly flat this year after jumping 32% last year. A weak dollar goes hand in hand with rising gold prices. When the dollar depreciates, it takes more dollars to buy the same amount of gold. PowerShares DB US Dollar Index Bullish (UUP), an ETF measuring the greenback against the most widely-traded global currencies, dipped 1% year to date after losing 1.3% last year.
“The ‘Most Valuable Player’ award for providing diversification so far this year goes to gold and silver, with an average negative 15% correlation to stocks,” Nicholas Colas, chief market strategist at ConvergEx Group, a global brokerage company based in New York, said in a client note Friday.
Gold miners stock prices outshines both gold’s 14% gain and the stock market’s 0.32% uptick this year. Market Vectors Gold Miners ETF (GDX), tracking a basket of large gold producers, soared 31% year to date, according to Morningstar. It regained much of its 54% nosedive from last year. Gold miners severely underperformed bullion last year because of higher production costs, civil unrest at mines on top of falling prices last year.
Much of gold’s advance can be explained by speculators, who sold short gold last year to profit from falling prices, closing their trades out this year. They have to buy back the shares they borrowed in order to return them, thereby stoking demand, says Rob Haworth, senior investment strategist at Minneapolis-based U.S. Bank Wealth Management.
“(Gold speculators) are now positioned in their most bullish posture in 14 months as fears have risen regarding global growth as well as conflict in the Ukraine with Russia,” Haworth said in an email. “We expect much of this support to erode as global economic growth improves and the Fed (Federal Reserve) continues to taper QE (quantitative easing).”
Higher interest rates, a stronger dollar and weaker commodity prices could result in an average price of $1,150 an ounce for gold in 2014, according to Bank of America Merrill Lynch. That would mean a 17% drop from its current level.
The 303 precious metals exchange traded funds on the market attracted $708 million in investor assets in February, according to State Street Global Advisors. That increased their assets under management by 7.7% in February and 9.2% year to date. The funds are physically backed by gold, palladium, platinum and silver.
The 14% gain in gold prices this year also outshines foreign stock markets. IShares MSCI EAFE ETF (EFA), a fund tracking foreign developed markets, which gave back 3% year to date. iShares MSCI Emerging Markets ETF (EEM), a measure of developing countries, fell 8% year to date.
By Trang Ho
U.S. Global Investors
Bank of America Merrill Lynch (report)
Janice Dorn (interview)
Rob Haworth, senior investment strategist at Minneapolis-based U.S. Bank Wealth Management (email)
Nicholas Colas, chief market strategist at ConvergEx Group (report)