THESE ETF´S ARE AS GOOD AS GOLD / MARKET WATCH

Opinion: These ETFs are as good as gold

By Dave Fry

Published: Dec 4, 2014 5:29 p.m. ET

 Gold bullion and related ETFs have taken a steep dive. A much stronger U.S. dollar, along with more confidence in the U.S. economy, are two big reasons.

The table below outlines the rise in gold prices since former President Richard Nixon's Bretton Woods Agreement in 1971 that decoupled the U.S. dollar from gold. This allowed gold and the dollar to float freely. Since that time the price of gold has risen dramatically while the dollar index has generally declined from its high in 1985 at 164.70 to an all-time low in 2008 at 77.58.

With dollar-index levels near 88.60, gold has generally been inversely correlated to gold prices. Below are two unannotated monthly charts showing this relationship.

 

 

Below is a breakdown of the various demand sources supporting gold. Jewelry remains by far the largest component and in this regard India is a standout. India this month removed the 80/20 rule which restricted imports, thus removing the cap on consumption.

 

Gold demand is broken down further, from ETFs even to dental work. In India, gold is a sign of wealth.
                        

Three ETFs primarily constitute global gold securities investments: SPDR Gold Trust GLD, -0.23%  , Market Vectors Gold Miners ETF GDX, +0.39%  and Market Vectors Junior Gold Miners ETF GDXJ, +0.65%  . Some miners, particularly small operators, will be hard-pressed to continue mining if gold prices remain depressed.

             

 

 

Marcus Grubb, a managing director at the World Gold Council, focuses on three themes for investors.

1. Return to fundamentals. Asian demand, including trading cartels and central banks, is steadily growing.

2. Central banks will continue to buy gold to satisfy portfolio diversification allocations.

3. Focus on the bigger picture. By the World Gold Council's estimates, 2,000 more tons of gold will need to be produced over the next five years. This demand will come most certainly from India, China and central banks. Where will supply come from? It's estimated in 2015-16 many mining projects, due to current price declines, will be delayed. Recycling of gold through jewelry sales won't make up the difference.

In many ways this is not much different than the issues oil drillers face, where lower prices makes new exploration less attractive. In addition, the Indian government's abandoning of 80/20 import restrictions may generate greater demand from gold's largest customer.