Sunday, October 11, 2009

All That Glitters. Is It Gold (ETF)?

Very often, things have to be written on what is fashionable to stay on the radars of "netizens". And so, without being an exception, this writer concerns himself with the movement of gold prices, which have reach record highs in recent months.

As you can see, on a 1-month basis, the price of gold, as tracked by the Gold ETF, outperformed, the US Dollar, S&P500 and the FTSE All Shares.

On a 3-month basis however, Gold ETF lags behind both the local and the American stock market. What becomes clear at this point is that the US dollar has been weaking vis-a-vis Stocks and Gold (in the form of ETF).

As we know and have read, the weakening of the US dollar can be attributed to the de facto printing of money by the US Treasury, which has been issuing bonds to help stimulate the economy.

But wait. 1 year since the financial crisis unravelled in full force starting with the collapse of the Lehman Brothers, the STI outperformed the dollar, US stocks and Gold ETF.

From the chart, it can be seen that Singapore's stock market, started to over take the other 3 references from the start of May this year. This was also just after the time, on hind sight, that the stock market hit a bottom in March-April.

What I would like to talk about more in detail is the 5 year chart. It shows Gold ETF convincingly beating Singapore and American stocks as well as the US Dollar.

A writer in his article on The Economist argues that the weakening of the US$ explains the shine in Gold ETF. He supports that arguments by showing that both the supply (which has been increasing) and demand (which has been weakening) for physical gold. This should actually show a downward trend in physical gold prices.

He elaborated further, saying that the weakening confidence in paper currencies can been in a rumour that OPEC will de-peg the price of crude oil from the dollar. Much earlier, there was also a rumour that Beijing was proposing an alternative to the dollar as the international reserve curreny. These are rumours which have since been dismissed. But the fact that they caused jolts to dollar on the days these rumours surfaced, suggests skittish investors.

What does it mean for the ordinary stock investor? I would suggest avoiding chasing "heat", that is, moving entirely to Gold ETFs. My suggestion is supported by the fact that short term gains from Gold ETF are not obvious. The winners riding on the Gold Bull have been those bitten by the gold bug a few years earlier.

This leads to the next question, should you buy US shares or US$? US shares you can buy, but be aware of the tax implications as well as the currency risks, which will eat into your gains.

For the US dollar, I really do not know and my best guess is as good as yours. What I think can happen is that the US$ will stay in a prolonged slumped till when the real economy recovers. There is an excessive debt in the US system, which it is trying to purge itself of. I am not saying debt is bad. What I am saying is that the debt and credit created from the sub-prime mess will take a long time to sort itself out and it is going to be a complicated process. 2011 will be a good time to believe that the sub-prime mess has cleared up.

Our conclusion brings us back to Singapore. Try not to worry and stay invested (if you are already in). As can be seen, the US Dollar has been underperforming compared to the Singapore stock market. You should only worry about the falling US dollar if you are and American on holiday or studying in Singapore. Otherwise, try to enjoy your weekend.

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