Gold hit an all-time high in 2009, marking the ninth straight year that prices increased. Some suggest its uptrend will come to an end, however, there are numerous forces indicating the contrary.
The first supporting force behind gold's strength is the unconventional policies of the U.S. Federal Reserve. The Fed is expected to maintain its short-term nominal interest rate target near or at zero through 2010, which is likely to provide strong support to gold prices.
Secondly, gold has turned into more than just an insurance policy against a falling stock market; it has turned into an enhanced returning investment vehicle. Traditionally, the metal has been used as a protection mechanism against market volatility and inflation and generally has an inverse relationship with the stock market.
However, the most recent data suggests otherwise. Gold has been rallying alongside the general market. Since its low in March 2009, the S&P 500 has gained more than 65 per cent, and gold has followed, adding more than 27 per cent.
One reason that this price appreciation has been seen is due to the net increase in investment dollars seen into the precious metal. Central banks around the globe have been gobbling up gold to hedge against the debasing of their own and foreign currencies caused by the massive amounts of cash used to fund economic stimulus packages and to diversify foreign exchange reserves. Toward the end of 2009, nations like China and India went on a gold-buying spree, purchasing billions of dollars worth of bullion from the International Monetary Fund (IMF) adding to their reserves.
Another factor likely to provide strong support to gold prices is the expected increase in demand derived from a growing middle class in developing nations. In general, as middle classes grow and incomes rise, these consumers demand and spend more on the finer things in life, like jewelry. With middle classes in nations like China, India and Brazil growing at an exponential rate, the demand for gold used in jewellery in these nations is likely to spike.
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Lastly, as the economy in the U.S. rebounds, inflation will likely be inevitable, further bolstering gold's appeal.
Three ETFs that will likely reap the benefits of an appreciation in gold prices include:
The SPDR Gold Trust, which actually holds physical gold bullion and closed at $111.37 (U.S.) on Friday.
The Market Vectors Gold Miners ETF , which holds various companies that generate revenue through gold mining, exploration and other gold related services, like Barrick Gold , and Goldcorp .
The PowerShares DB Gold), which tracks gold futures contracts and closed at $40.74 on Friday.
When investing in these equities, it is important to consider factors that could potentially hinder the price of gold, like an earlier-than-expected tightening of U.S. monetary policy by the Fed. A good to way to protect against these factors as well as the inherent risks involved with investing in equities is through the use and implementation of an exit strategy, which triggers price points at which an upward trend in gold could potentially be coming to an end.
According to the latest data at SmartStops.net, the price points for the aforementioned ETFs are: GLD at $108.56; GDX at $47.28; DGL at $39.73. These price points fluctuate on a daily basis and reflect changes in market conditions. Updated data can be found at www.SmartStops.net.
Kevin Grewal serves as the editorial director and research analyst at The ETF Institute, which provides financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). He also serves as the editorial director at SmartStops.net where he focuses on mitigating risks and implementing exit strategies to preserve equity.