We've repeatedly acknowledged in the past that exchange-traded funds (ETFs) that are either backed by gold or connected to the industry through gold mining shares are hardly an equivalent replacement for owning physical gold. That being said, they are quick-and-easy proxies to the gold price. Insofar as this is the case, it can be helpful to draw certain conclusions from ETFs about how markets are behaving and what traders are paying attention to.
Judging from recent activity in gold ETFs, there is some indication that the fate of several leading gold miners could improve dramatically to close out the year, while it could also be a harbinger of higher gold prices.
Gauging Gold's Momentum
There is certainly a degree of trend-following and bandwagon-riding that goes on in the financial markets. You might hear this called "buying momentum." Since the beginning of the week, the yellow metal has managed to rally and subsequently hold onto its gains over the last three days. This is undoubtedly the kind of positive momentum that traders and investors have been waiting for. It seems that during the bear market for precious metals over the last 3 years or so, every time that gold sees some buying pressure, it fairly quickly gives it all back.
There are signs in the paper markets that gold may be ready for a technical breakout, as well. Total bullion holdings in gold-backed ETFs are once again on the rise after months (check that, years) of net outflows from these funds. The gold bullion underpinning ETF holdings rose to their highest levels since July to begin October. The largest gold-backed ETF, the SPDR Gold Trust (NYSEARCA:GLD) saw its bullion holdings rise 1% month-over-month to nearly 690 metric tonnes of the metal.
The tide appears to be turning in favor of the metals, and technical charts for gold ETFs back this up.
Influence from Gold Mining Companies
With the ETFs that track gold mining stocks, you would obviously benefit from an upswing or recovery for the gold miners, but you can perhaps hedge against a slide for any individual mining company (FCX and GLEN look particularly risky) by using ETFs to get broad exposure to the industry with only limited exposure to each individual miner.
This is why most experts will say that gold mining stocks are for those with a bit more risk tolerance—and, naturally, offer a higher potential yield than ETFs. Meantime, ETFs may be for the more risk averse while offering more modest yield potential. Again, this explains how gold mining ETFs may give a bit of the best of both worlds.
(To be sure, this should not be taken as investment advice! We provide it for general information purposes only. Please consult a professional before making any investment decisions.)
While there is no doubt that there is no more direct exposure to the gold market than buying physical bullion, gold ETFs and gold mining ETFs might be more appropriate for certain investors or traders, depending on their individual goals.
At any rate, many experts will be watching closely for signs that the gold mining sector will start to bounce back during the fourth quarter. If this does turn out to be the case, it will undoubtedly be lifted by the entire gold market rising.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.