Gold ETFs Likely To Lose More Luster: Analysts
By TRANG HO, INVESTOR'S BUSINESS DAILY Posted 12/12/2011 06:29 PM ET
A sudden dollar rally and broad stock market sell-off tarnished the appeal of gold and silver ETFs Monday amid fears European Union leaders haven't done enough to contain the region's debt crisis.
SPDR Gold Shares (GLD) and iShares Silver Trust (SLV) both slipped about 3%. In the futures market, gold prices fell to $1,664 an ounce — booking their biggest one-day drop in three months. Silver futures fell 3.3% to $31 an ounce.
PowerShares DB U.S. Dollar Index Bullish (UUP) gapped up 1%.
Institutional investors are liquidating their gold positions to raise cash, primarily U.S. dollars, explained gold experts.
"A liquidity squeeze means banks and brokerages are scrambling for currency right now to meet demand," said David Morgan, publisher of the Morgan Report, which specializes in gold and silver. "As much as gold is the ultimate currency, it is not used for final settlement now. Therefore, cash will be king for the intermediate term, and gold could fall even further on a temporary basis."
Adam Grimes, chief investment officer of Waverly Advisors in Corning, N.Y., sees GLD trading in a bearish trend for the next two to four months and falling to its January high of $140 a share, down 13.5% from Monday's price.
"Gold is trading as a risk asset. It may as well be soybeans, cocoa or equities," Grimes said. "People are making trading decisions with the same knee-jerk reaction like any other equity."
"Inflation levels have been contracting in China and the developing world. That might affect how people see gold as an inflationary hedge," Grimes added. The bearish development in gold prompted Dennis Gartman, publisher of the Gartman Letter, to cut his position. Gold's chart has fallen through an upward-sloping trend line, he wrote in Monday's newsletter.
Peter Spina, president of GoldSeek.com, believes that gold will trade in a sideways, volatile manner in the short term and eventually resume its uptrend.
"Gold is the optimal place to be during a banking-monetary-financial crisis, where the decision makers' only tool left is more and more liquidity, which will eventually wipe out great value of the euro and the U.S. dollar.
"These actions are overwhelmingly bullish for gold and silver prices, and once a clearer path on how the additional liquidity will be structured, the markets will calm and the precious metals will fly," Spina added. "This could be another month-or-so process, but I do not believe this sideways market is going to last for too long. I view these pullbacks as excellent investment and trading opportunities."