Gold hasn’t been very precious or shiny over the last year or so.
As perceptions about the global economy began to improve - along with lowered inflation expectations - the Federal Reserve began tapering down and abandoning its quantitative easing (QE) programs designed to prop-up the stagnating economy. That sent gold investors running towards the exits. Bullion held by various exchange traded funds was dumped and prices for gold plunged nearly 28% last year.
However, according to some analysts, many of the catalysts that brought down gold last year may finally be fading, and a new bull market in gold could be starting.
For investors looking for a golden rebound, the time could be now. The basic gist is that the global economic situation isn’t as rosy as it seems.
First, the various currency and debt issues in a variety of emerging markets are causing some investors to get a bit uneasy. Argentina once again may be on the verge of a default, while Venezuela and Turkey are struggling to keep their respective bond markets a float. Meanwhile, China - in an effort to enact more free market policies - has decided to let firms be more responsible when it comes to corporate borrowing. Previously, firms would have been bailed out either by banks or by the government. Already, two solar developers, one steel company and one housing firm have defaulted on their obligations. With nearly $4.2 trillion in corporate bonds on its books, rising defaults in China are a huge cause for concern.
Then there’s the situation in the Ukraine to consider. The threat of reigniting the cold war is a serious one.
At the same time, economic growth in the U.S. and developed world is starting to wane, as well. Consumer confidence is down, manufacturing data is beginning to top out and job growth has begun to wane. Again, these conditions could prompt the Fed and European Central bank to continue their QE programs in order to boost economic growth.
All of which are bullish factors for gold prices in the upcoming year.
Analysts at Nomura (NYSE:NMR) recently upped their full year forecasts citing these reasons as well as decreased gold supplies hitting the market. The Japanese bank predicts that gold will average $1,335 this year and $1,460 in 2015. Previously, Nomura predicted $1,138 and $1,200, respectively. This echoes similar upwards price revisions from UBS (NYSE:UBS).
Snagging Some Gold
Already, these factors have caused gold to move upwards. The precious metal now sits at new six-month highs. However, given the bullish forecasts, investors may want to add a little exposure to gold in their portfolios.
With more than $34 billion in assets, the SPDR Gold Shares (NYSE:GLD) still remains the king of gold-related ETFs. The fund is physically-backed and represents the share of gold bars stored in a vault on behalf of investors. The ETF features high liquidity and relatively low operating expenses at 0.40%. It’s easy to see why it’s the most popular pick for both retail and institutional investors. However, for those looking for more of a “buy-n-hold” opportunity, the iShares Gold Trust (NYSE:IAU) features lower expenses at just 0.25%. Both funds can be used as a great way to play the long-term rise in gold prices.
Another potential buy for investors could be the various gold-backed closed-end funds (CEFs). CEFs have an affixed number of shares and often trade at discounts or premiums to their actual value. Both Central Fund of Canada Limited (NYSE:CEF) and the Sprott Physical Gold Trust (Nasdaq:PHYS) currently can be had for discounts to their NAVs. This means investors can snag gold even cheaper than market prices. In the case of Central Fund of Canada Limited, it’s a hefty 5% discount.
Finally, one of the biggest drawbacks and headaches to these physically backed funds comes down to the issue of taxation. These ETFs are counted as collectibles, meaning long-term gains in these funds are taxed at 28%, instead of the usual capital gains rate of 15%. The gold exchange traded notes (ETN) could circumvent this problem. Both the UBS E-TRACS CMCI Gold TR ETN (NYSE:UBG) and PowerShares DB Gold Double Long ETN (NYSE:DGP) can be used by investors looking to limit their tax liability. The PowerShares fund also adds leverage to the mix and has skyrocketed - meaning as gold prices rise, its share price will soar.
The Bottom Line
While it’s been a hard couple of years for gold, things may be finally looking up for the precious metal. The geo-political and economic situation is pointing towards higher gold prices in the near future. For investors, that could mean betting on the metal once again. The previous picks - along with the ETFS Physical Swiss Gold Shares (Nasdaq:SGOL) - make ideal ways to ride those higher gold prices.