Gold ETF Frenzy Drives Gold to All-Time Highs


Gold’s rally in 2011 was one for the ages, where the price reached $1,889 an ounce. Many wondered how long it would take us to get back there, but wonder no more.

Gold isn’t always the best place to have your money, in spite of how so many people throw money into it blindly, paying no regard to where it has been or where it might be going. There are other times where it really is going somewhere, where this can be a great asset to be in, and one of those times is definitely now.

When we look at gold or any asset, we view it from the perspective of looking for whatever opportunities that may exist with it, and gold is definitely an asset where timing is everything, much more so than stocks. With stocks, you can jump on any time and ride the long-term wave if you wish, but gold barely keeps up with inflation over the long term and dramatically pales compared to stocks, even though it does beat bonds over time, although that is not saying much.

However, there are some real ups and downs along the way, and when we invest in gold, we can make money both ways provided that the move is a real one. Gold isn’t an asset that you can just be in all the time, because it moves sideways quite a bit as well, and we want to be in when it is really taking off or dropping, enough in a way that it makes sense to be in it versus whatever else we could have our money in, in stocks instead for instance.

People tend to view assets in isolation, for instance looking at gold and thinking that it has a good potential to go up, and then just jumping in instead of comparing it to what could be achieved with other investments.

A good example of this would be after the pandemic wave of selling hit the stock market last February, and we then had to choose where we were going to put our money instead. Stocks were toxic, and we looked at both bonds and gold, places where people put their money when stocks are tanking, at least people who are looking to not only protect themselves but look to turn these events to their advantage rather than just standing there and taking some big punches without even an attempt to block them.

We chose bonds at the time, and even though both were much better choices than stocks getting ready to take a big trip south, bond trading at the time was stable while gold was more all over the place. This is especially important if you are going to use leverage, and using leverage with gold for investors isn’t such a great idea as buying it straight up is plenty volatile enough for them and the only way you can do this safely is to be willing to jump in and out quite a bit as needed, riding much shorter trends than many of our readers would be willing or able to do.

The leveraged bond play that we recommended at the time worked out extremely well, but as the bond market quieted down and stocks started to lift themselves off the ground after banging their head so hard, it was time to leave the world of bonds for the pasture that had been burned by the COVID-19 inferno and were now getting ready to green up.

Bonds have done nothing since while stocks have moved up a lot from there, and for bonds to be back in the conversation, stocks will need to at least head in the wrong direction again. Bonds still look flat and the next move for them of any meaningful amount will probably take us the wrong way, so there has to be enough upside to overcome their risk to make sense of jumping back on this horse anytime soon.

Sometimes assets fail comparatively, providing a lesser opportunity to make money than something else, but when they are failing absolutely, losing to the number zero, doing the sensible thing is made even easier. All we need is to know what a negative sign means and why that is bad with money.

We’ll have to look for something else when this happens besides stocks, if the Democrats protest the stock market and the economy in the way that they promise to if given the chance, and they get that chance, which appears pretty likely right now. Only those who don’t understand the role fear plays in the stock market are not afraid of this, and with Washington pointing such big guns at Wall Street, even wanting to bring it down to a large degree, there will be plenty for them to fear.

Gold could be worth a look, if it continues to move forward when stocks hit the skids, but these things move together a lot. The wisest way to handle this would be to do something that sends shivers down the spines of the great majority of investors, trading in their long positions for inverse stock ETFs, the sort we want to see stocks go down with.

Dealing with Different Circumstances Requires Adaptive Strategies

If your mind has been opened up enough to become a switch hitter, the worst news won’t scare you, in fact this will make you even more excited. They can shut down things for as long as they want, they can turn our cities over to criminal gangs, they can blow whatever amounts of money they want, get rid of all the tax advantages investors have, tax us all a lot more, or whatever they want and we may lot laugh all the way to the bank as none of this stuff is funny but we’ll be smiling when we get there.

That time is not here though and stocks just keep chugging along, where we need to keep following the money. If there’s more money in stocks than bonds or gold, you go with stocks. If gold and stocks are both doing well, as they have lately, you can go with both if you wish. If nothing is working, you hold your money rather than give up some.

The investment world doesn’t seem to realize very well that this game is about making money, and you’ll make more money sticking to what is making money than not caring about this and especially choosing things that instead lose money over a clearly discernable period like this last crash.

Avoiding gold during the stock crash and going with bonds instead turned out to be the right call, as gold actually lost money between stocks going over the cliff and their hitting the ground, in addition to being at a time where gold was just too volatile and unpredictable for anyone but good traders. Once gold did bottom as well around the same time stocks did, after giving up 12% between February 9 and March 18, things started to look up more for gold as they did for stocks around this time.

Gold certainly lost less during this brief bear market, but losing less should never be the plan. We’re trying to make money with these things, not lose money, and we should never console ourselves that we lost less in one asset over another, because when you have two assets that are losing money, being in neither is the preferred path obviously. This is not so obvious to many though.

Since then, we’ve been mentioning here and there how gold looks pretty good now, and we certainly weren’t alone in this view. The gold peddlers will always try to get you to believe gold is hot, and will shamelessly try to embellish any real positivity that exists, but we’re talking about people like ourselves who have no bias here and where seeking to discover the truth will do just fine.

These folks have been talking about gold possibly heading to a new all-time high, but hardly anyone expected it to happen this fast, especially with stocks and the overall view holding up so remarkably well. Few realize how the increased potential for velocity that we have these days has changed things, and even though we do get this, even we were surprised that we’ve come this far this fast.

There are two main ways to invest in gold, by buying gold itself or by buying shares in a gold ETF, like the SPDR Gold Shares ETF (GLD), where you own a piece of a pool of gold. Today’s gold market is nothing like it was in the days where gold bullion was the only game in town. This transition keeps accelerating, and does need to be borne in mind as we look to navigate today’s new frontier in gold.

The benefit to gold traders and investors is that the gold market is so much more liquid than in the old days when you had to actually buy gold bars or coins, pick them up or have them shipped to you, and send it back when you want to exit your positions. Bullion trading by individual investors also involves paying a very big spread, the difference between the buy and sell price, where you have to see your trade make this much before you even get out of the hole.

Today, all you have to do is buy shares in a gold ETF such as GLD and you can instantly hold a gold position, and gold ETFs also allow you to speculate on the price going down as well, something you can never do with physical gold. Both sides of this are active in the market now and that in itself has added a lot of liquidity. This not only makes it much easier to invest in gold, it also expands the market for it because it provides so much more access to it among investors.

Succeeding with Gold Investing Does Require Skill and Attention

We always want to be investing with a good plan, which does include thinking about what we are doing, something not a lot of people do much of when they look to get into something like gold, or invest in anything for that matter.

Doing this right isn’t that difficult. The opportunity to diversify your stock positions with gold over the last couple of months, when the path forward with stocks was so murky but both stocks and gold were trending positively is a great example of a wise use of investing in precious metals, as are times where stocks are going down but gold is going up, which does happen from time to time.

If we know some basics about reading a chart, this makes things all the better, and if you think that you can do well with something like gold without using charts you are in serious need of a lesson. We might see something like gold being up a certain amount over a certain period of time but this is like trying to drive with your eyes closed, and you might stay in your lane that way but it’s just better to see what path your car is travelling.

When we look at the chart of GLD, which tracks gold because it is comprised of gold holdings so you don’t have to look at any other chart to see how gold is doing, it was in a sideways pattern from the middle of March to June 22, when it finally broke out again to the upside.

While holding in sideways patters with the expectation of something going higher soon isn’t all that bad of an idea, what we really want to see is something actually fulfilling its potential. When GLD hit $165 a share on June 22, the game was on, as this was attempt #6 to get past this area and it’s just better to get in on the real moves instead of the fake ones.

GLD now sits at $182.05, which also happens to be at an all-time high for gold, and you didn’t even have to leverage this to get a real good return over just a little over a month. That’s about a 120% annualized return if you are keeping score.

If you are instead up for the iShares Ultra Gold ETF (UGL) which doubles your leverage, it’s up 19% since then, although something like this should really only be used by experienced traders as gold is not so leverage friendly due to its higher volatility. We’re doubling the risk as well and have to be more on our toes, making the right decisions when they are required and especially not trying to trade this on the seat of your pants, or worse, with your hands in your pockets.

The real money lately has been in another ETF which doesn’t track gold itself but tracks gold mining companies. The 2X leveraged Direxion Gold Miners Index ETF (NUGT) is up a very impressive 56% since June 22.

This was not a fund you wanted to be in late February when the coronavirus crash happened, where this stock fund lost 88% from top to bottom. If you were in a leveraged gold stock during a horrific crash and held on to it, you got what was coming to you, and funds like this need to be treated with more care than normal and never with wanton recklessness.

Gold is moved by market action just like anything else, and is actually as close as you can get to an asset with no corresponding value in the real world, like digital assets, as you will ever see. Demand for gold for other than investing purposes is just along for the ride here, and speculation drives the price of this stuff virtually completely.

The crowd has really gotten excited about gold lately and this has help pushed it to these heights, and there may be more in store. Gold ETFs becoming hotter is helping push this price up. We’ve seen a lot of money put into them lately and especially over the last month when gold started to really move up and trade at higher prices than ever.

The recent weakening of the U.S. dollar has spurred this on as well, and unlike with stocks, where the correlation between gold and stocks is too weak to even consider, gold does correlate very well normally with the dollar, in an inverse manner.

When the dollar goes down, gold tends to go up. The dollar is going down, particularly due to the Europeans being much more willing to step up and throw a lot more money at their economy while the U.S. has been in gridlock on this issue for a while now.

With the dollar down 7% over the last three months, and Goldman Sachs forecasting another 5% more over the next year, this is quite bullish for gold. It’s not hard to figure how this happens, because gold gets cheaper per ounce in these other currencies that are gaining in value as the dollar weakens, stimulating demand.

Without gold moving at all, if the dollar goes down by 7% versus the world’s other major currencies, you can buy 7% more gold for the same money, as if it has gone on sale. You can bet that some real big players from other countries are not going to pass up on a sale this big.

This effect isn’t just about how much the dollar has gone down but how much it is expected to weaken further, and when you put this together with an asset like gold that people are expecting to continue to go up, there are now two big reasons to be bullish on it, not just one.

It’s fine to jump on moving trains like this as long as you realize that you have to really watch your step or you will be thrown to the side of the tracks at a higher rate of speed and can really hurt yourself. All we have to do is look back at the last gold rush in 2011-2012 to see this effect, and the steeper the climb, the steeper the other side of the mountain is as well.

GLD first hit the market in November 2004, near the base of the mountain that was about to form over the next few years, at $44.43. The summit was reached in August of 2011 at $183.51. A little over 4 years later, it hit $100.23.

Holding from $183 to $100 is just crazy, but plenty of people did, and the ones that got in early on this ETF and were left with at least a decent average return of 11% over the 11 years it took to cross this mountain were probably not too disappointed. Why anyone would want to ride a bad move down over 4 years where they could and definitely should have booked in a much better return once the jig was up and it started to really go the other way is another story.

As exhilarating as it may be to drive fast on the highway, we should not want to do this in the wrong lane, which is a good way to describe this. Gold is not like stocks where we can seek to impose our own conditions on our investments, like holding them for decades and coming out looking good, where you don’t even have to look at the road along the way. You need to look at it a lot more with gold because most of the action is up and down and not really ahead so much, like mountains.

Gold has never been a good investment overall, where you can just set and forget them, like you can with stocks, although with the right timing, like lately, it sure can be. Those who are in it now as well as those who are thinking about getting into it need to pay close attention to the road ahead, and while gold doesn’t just collapse like stocks can and falls at a slower rate than this, it does fall and sometimes it falls quite a bit.

Gold itself always glitters, but gold the commodity takes on various degrees of sheen. It’s as shiny as it has ever been right now, but it can dull pretty fast as well, especially if profit taking starts kicking in a lot. This mountain is too steep right now not to want to watch your step.

Andrew Liu


Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.

Contact Andrew: [email protected]

Areas of interest: News & updates from the Consumer Financial Protection Bureau, Trading, Cryptocurrency, Portfolio Management & more.