01
Nov
2010

ETF Periscope: Is Gold a Little Too Hot To Hold?

Is Gold a Little Too Hot To Hold?

by Daniel Sckolnik of ETF Periscope

“You can't have everything. Where would you put it? ~ Steven Wright

If you want to try to sum up the market action over the last month, you could say it’s mainly been “upward thrust, followed by three plus weeks of sideways.”

There have been probes to the upside and probes to the downside, but the distance traveled by both the Dow Jones Industrial Average (DJIA) and the benchmark S&P 500 Index (SPX) over the last 18 sessions has primarily been within a 2% inter-day trading range. Compare that to September, when the Dow decided 10,000 was terra firma support, and spent the better part of the month traveling north to end up about 8% higher. The SPX performed even better in September, finding strong support at the 1,050 level and bounding up strongly throughout the month, ending up over 9% higher. The exception to the sideways pattern was the recently resurgent Nasdaq Composite (COMP), which continued to illustrate tendencies of a more trending nature, rising about 5% over the same 18-session run, particularly impressive following the previous month’s approximate10% gain. Hedge funds in particular seem to have established a craving for the tech sector, and their attention has helped goose this index upwards in a steady fashion.

And gold?  Stay tuned; we’ll delve into that one in just a bit. 

All in all, last week was a market that seemed to show signs of befuddlement. The DJIA was down, albeit slightly, on the week, though it ended up over 3% for the month, the best it’s done in October in four years. The SPX was up by the smallest of margins as of Friday, up nearly 4% on the month, its best October performance in seven years. The Nasdaq? Barely up over 1% on the week, but nearly 6% on the month.

The mixed response to the week’s potpourri of economic and financial news seemed to leave investors with either ambivalence or uncertainty, hard to say for certain which, but the effect on the markets being similar in either case. The news included the release of the Reuters/University of Michigan’s consumer sentiment report, which fell from 67.7 from 68.2 for September. The dreaded term “double–dip recession” has refused to go away, in spite of the official proclamation that we are out of the recessionary woods. Consumers, it would seem, don’t appear to concur.  Their feelings would seem to be backed by the sluggish growth as illustrated by the GNP, which grew at an annual pace of 2% over the course of the third quarter, barely a notch above the last quarter, when it came in at the rate of 1.7%.

The primary buzz topic was certainly focused around the Fed, and the level of stimulus that would be wielded by Bernanke and Company against the lingering drag of unemployment, bad housing stats, and “barely there” economic growth.  When the Fed meets next week, it is, as always, unlikely that much will be actually resolved, but as always, tea leaves will be read and words interpreted just enough to shock the markets, perhaps even enough to move them with greater commitment in one direction or another. It may be enough to move the markets to break above the year’s highs, or maybe tilt them towards a necessary correction.

Not to be underestimated is the impact of the mid-term elections. Regardless of your politics, the consensus is that the stakes are inordinately high, and that what happens after Tuesday’s results emerge could cause Wall Street to either cheer or jeer, using the markets as their method of indicating their sentiment.

Now, a quick look at gold. Since this is an ETF-themed commentary, I’ll use GLD (SPDR Gold Trust), which is designed to track the spot price of gold bullion, as representative for the metal. As has been obvious to anyone with access to just about any news source, gold has been on a wicked uptrend for the last four months, touching on new highs on a regular basis for much of September and parts of October.  GLD hit 134 mid-October, corresponding to the all-time high of the spot price of the precious metal, but since then dropping about 3% to the 130 mark. But the appetite for the metal seems to remain, and it seems to be moving back up, indicating that it might consider re-exploring its all-time highs.

If you want to place all your chips on the precious metal at this time, you might give pause. The number of factors that could carry gold substantially higher in the short run appears to be limited. Sure, sovereign funds of a number of countries will likely continue to gold, as there is little downside to hording caches of the metal, both as an inflationary hedge and as a solid alternative to the dollar in the event of possible fissions in the international currency picture. However, for most small investors, putting all your marbles in one bag is a risk that hardly warrants the rewards. A severe downturn in the markets at this time or the near future would certainly contribute to popping what some would consider is no more than a “gold bubble.”

In the long term? There’s a lot to like about gold. The metal as inflationary hedge is the obvious one, and with the likelihood of more quantitative easing by the Fed, so expected that it has generated its own cute moniker—“QE2”—inflation would hardly be a surprise to anyone who has been paying attention. Also, in the event of a “Black Swan,” so named after the title of Nassim Nicholas Taleb’s book on the subject of extreme and unexpected events, gold would not be a bad thing to own. And as many are betting that gold will continue to rise, again in the long run, that consensus is adequate to make it happen.

So, as always, take stock of your stocks, analyze to see if all things are equal in your equities, and then consider how much of a position you want to take in a commodity that long term should treat you fine, but in the short term might correct to a level where the profit-takers meet the gold bugs.

ETF Periscope

Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

ETF Periscope
daniel / Tag: COMP, DJIA, Dow Jones Industrial Average, GLD, NASDAQ, S&P 500 Index, SPX /