Gold, the most sought-after precious metal, seems to have lost its sheen lately. After delivering 12 consecutive years of positive returns, gold is slated to incur its first annual loss in a period of 13 years, having slid 24% since the beginning of this year.
This trusted metal, considered as a safe-haven, lost its appeal to other asset classes of late. Equity won the race over gold, delivering stellar returns so far this year. The gold-backed funds have plunged almost in the double digits year to date. (Read: Energy ETFs Surge on Q3 Oil Service Earnings Beats)
Before we take a closer look at some of the gold ETFs, here are some insights as to what led this yellow metal into a bear market.
Reasons for Decline
The biggest reason for the fall in gold prices seems to be Fed’s consideration of a gradual exit from its bond buying program. With the global economy slowly picking up, gold has fallen out of favor. Investors have been dumping gold as they believe that the Fed will ultimately bring its monetary stimulus policy to an end. The end of the stimulus program might bring the era of low interest rates to an end, reducing gold’s appeal.
Moreover, a decline in the inflation level across the globe, particularly in the developed economies also diminished gold’s value as a hedge against rising prices. (Read: 4 Unbeatable ETF Strategies for Q4)
The series of events led to a bear trend in the bullion market, pushing it below $1,300 an ounce last week, almost 33% below its record high of $1,921.15. Though currently the metal is trading a little higher than $1,300 an ounce, the metal is down almost 27% over the past 1 year, marking the worst annualized performance since 1985. (Read: 3 Biggest ETF Winners from the 3rd Quarter)
This was felt in gold ETFs with SPDR Gold Shares (GLD - Free Report) , ISHARES Gold Trust: (IAU - Free Report) and Physical Swiss Gold Shares (SGOL - Free Report) , all delivering negative returns of around 3% last month. In fact, all the three ETFs have eroded around 20% each from an investor’s portfolio so far this year.
The gold mining space has also felt the brunt, faring even worse, as it usually holds leveraged positions and plays gold via both the upside and downside. The most popular gold mining ETF, Market Vectors TR Gold Miners (GDX - Free Report) , has lost a little over 10% in the last month, while Market Vectors Junior Gold Miners ETF (GDXJ - Free Report) has lost around 18%. Moreover, these ETFs have made a deep hole in the investor’s pocket, plunging nearly 50% since the beginning of the year.
Although a no-taper announcement by the Fed in its September 2013 policy has given a breather to the falling gold prices, a positive bet on gold at this juncture is a little risky. Additionally, the recent jump in gold prices above $1,300 an ounce on resumption of federal operations on a deal which will allow financing the government until Jan 15, 2014, is believed to be only on short covering.
A delay in tapering of the Federal Reserve's monetary stimulus will provide merely a temporary respite from the selling pressure. Analysts predict that once the Fed begins with its taper program, gold will feel the downward pressure again.
Moreover, Goldman Sachs has projected that for the last quarter of 2013, the metal might average around $1,250 eventually declining to an average of $1,175 an ounce in a year’s span.
That being said, investors may want to avoid these products for the time being, as more losses could definitely be round the corner.
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