Gold's Rise Taunts Advisors Who've Seen This Before

Investors wonder if gold's surge past $2,300 is a breakout or another fake-out.

Reviewed by: Staff
Edited by: Ron Day

Better late than never. 

That might describe the recent breakout for the price of gold in U.S dollar terms. After several flirtatious attempts going back more than a decade, it finally crossed $2,000 an ounce and stayed there for longer than a fortnight. 

Gold pierced that round number mark back in August of 2020, only to disappoint those expecting it to skyrocket higher. And way back in September of 2011, gold peaked at more than $1,900 an ounce. At the time, it seemed destined to go up much more, or so the headlines at the time claimed.

Gold, with limited industrial applications but centuries of symbolism and use as an actual currency, has its army of perma-bulls. Still, for a long time, advances in the metal's prices have been slapped back like a rejected basketball shot. 

Now, with a closing price last Friday above $2,300 an ounce, and up more than 25% since last October, gold fans are feeling it again. And who can blame them. Inflation may be re-accelerating, the U.S. Dollar is backing a $34 trillion pile of debt, and market technicians can make a case for much higher prices, now that the long-term “breakout” has finally occurred.

Gold ETFs Ups and Downs 

Parabolic moves like the one gold just had might be a double-edged sword. Holders of the two dominant asset-gatherers in the gold commodity space, the $61 billion SPDR Gold Trust (GLD) and the $28 billion iShares Gold Trust (IAU) have seen those ETFs move like a roller coaster in recent years. They've doubled since early 2016.

Financial advisors have watched clients get excited about big moves in tech stocks and small caps, a giant bond market rebound, and bitcoin. And that’s just in recent memory. Yet all of those moves have, or are hinting at, what I refer to as the “Empire State Building” chart formation. That is, a sudden spike higher, that soon reverses in large part or in total. Picture the top of New York’s Empire State Building, which narrows at the top, then ends with a long needle at the peak. But that needle has two sides. Will the gold chart resemble that in a few months? 

Gold is a most intriguing ETF asset class, since it can be owned via funds that track the price of gold, the commodity. However, gold mining stock ETFs allow advisors to allocate to a version of the gold trade that has revenue, earnings, people, and operations behind it. That all just happens to involve the business of mining that yellow metal. 

Gold Mining Stock ETFs 

Funds like the $14.2 billion Van Eck Gold Miners ETF (GDX) and the $114 million Sprott Gold Miners ETF (SGDM) are among the 14 gold mining ETFs tracked by the database. And unlike gold itself, they are still quite a distance from making all-time highs. They are part of the basic material sector, which is a small portion of the S&P 500 that hasn't kept up with market leaders in tech and elsewhere. That could set up an opportunity for advisors to increase allocations to a relatively out of favor industry that can potentially follow its underlying commodity price higher. 

This could be a golden moment for ETF investors and advisors that allocate beyond stocks and bonds. Or it could be another “fake out breakout” as we’ve seen in gold and many other asset types in the past. But without a doubt, gold is once again, as with much of the jewelry it is used to make, quite a conversation piece. 

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.