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Broad commodities ranging from bullion to agriculture failed to perform in 2013 thanks to Fed tapering concerns, strengthening dollar and continued bullishness in the stock market. In fact, gold suffered its biggest annual loss in three decades plunging about 28% on the year. This also represents the end of 12-year bull run for the yellow metal.
Bleak Outlook
The pickup in global activity has encouraged a brighter economic outlook. As investors pour money into stocks over commodities, gold investing may stay out of favor in 2014 (read: No Respite for Gold ETF Bear Run).
The world’s largest economy is showing speedy recovery on a healing job market, solid retail and housing data, and upbeat manufacturing and industrial data. This prompted the Fed to pare its massive stimulus program, potentially resulting in a strong dollar and higher interest rates. A surge in the dollar would continue to dampen the demand for gold as a safe haven.
Additionally, persistent low inflation in the U.S. and many other countries may continue to hamper gold’s appeal as a hedge against inflation.
Further, the bearish trend might continue according to various market experts as well. One of the research firms – Goldman Sachs (GS) – expects gold price to fall at least 15% in 2014 from the current level while another investment firm – UBS – projects a 13% fall in the precious metal.
Still Some Hope
Despite unfavorable trends, gold started 2014 on a solid footing thanks to the growing demand for gold bars and jewelry in Asia, the largest consumer of bullion. Generally, the demand for gold as store of wealth increases in China during the Lunar New Year and the Chinese holiday.
Additionally, the Indian government might reduce gold import duties from the current 10% encouraged by improving trade deficit and a rebounding currency. This move would spur gold demand in the second largest consuming nation and brighten the prospect for gold holdings in 2014 (read: Can India ETFs Rebound in 2014?).
Further, the global gold market could face a supply crunch because of production pullbacks and mining development delays that would propel the prices higher. Apart from these factors, the Fed has committed to keep interest rates at lower levels for some time. So even with the tapering in place, the yellow metal might regain its shine this year.
With the hopes of a rebound in bullion this year, bullish investors could take advantage of the lower gold prices by considering any of the following ETFs. We have highlighted four gold ETFs that could be interesting plays in the coming months, especially if fundamentals for the gold market continue to improve.
These funds seek to match the spot price of gold, net of fees and expenses, and own gold bars to back the shares. These products hold a decent Zacks ETF Rank of 3 or ‘Hold’ rating (see: all the Precious Metal ETFs here).
SPDR Gold Trust ETF (GLD)
This is the ultra-popular gold ETF with current AUM of nearly $31.3 billion and heavy volume of more than 8.6 million shares a day. Given the unfavorable trend for the gold market, GLD has seen the worst outflow in 2013, shedding over $25 billion in assets. It charges 40 bps in fees per year from investors.
The fund tracks almost 100% of the physical price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. Each share represents about 1/10th of an ounce of gold at current prices. The ETF lost about 27.7% in 2013.
iShares Gold Trust (IAU)
This is the second largest fund in the gold space that bled a net of $2.35 billion in assets in 2013, lowering its total base to around $6.3 billion. The product is backed by physical gold under the custody of JP Morgan Chase Bank in London. Each share represents about 1/100th of an ounce of bullion at current prices.
The ETF charges 25 bps in fees and expenses and trades in solid average daily volume of roughly 5 million shares. IAU was down 27.6% in 2013 (read: Can Gold Mining ETFs Dazzle in 2014?).
ETFS Physical Swiss Gold Shares (SGOL)
This fund holds physical gold bullion bars of secure vaults in Zurich, Switzerland and saw outflow of $390 million, leading to total AUM of $1 billion. Volume is moderate, trading under 50,000 shares per day. The product has expense ratio of 0.39% and lost 27.7% in 2013.
ETFS Physical Asian Gold Shares (AGOL)
This ETF is the least popular and illiquid with AUM of $53.4 million and average daily volume of under 1,000 shares. The product saw its asset bank shrink by $6.76 million in 2013, following the others to lower asset levels. The fund holds bars of secure vaults in Singapore under the custody of JPMorgan Chase Bank, USA. AGOL declined more than its counterparts, plunging 29% in 2013.
Bottom Line
It seems that the global sell-off in bullion might be overdone at least for the near term given that momentum for gold is building. Additionally, the U.S. equity market was off to a feeble start in 2014 driven by worries about slow growth in China. If this continues, investors might shift their exposure to safe avenues like gold (read: 3 Commodity ETFs to Watch in 2014).
Moreover, buying could be in the cards if more Chinese demand hits the market or India eases import restrictions, so there still may be some hope for gold this year, though it does look to be a very rocky road either way.
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