Respond To Strong U.S. Dollar With Gold ETFs

By Gregory S. Davis | November 19, 2008 AAA

The U.S. economy has slowed, but the value of the U.S. dollar is riding high, setting the stage for gold to shine in the future. The U.S. Dollar Index Futures Spot price closed at $88.23 on November 20.

Investors concerned about the additional debt the U.S. is taking on in the form of the $700 billion bailout package and the ongoing wars in the Middle East should consider the following Gold ETFs as potential store of value that is likely to rise when the U.S. dollar retreats. (To begin with the basics, check out Does It Still Pay To Invest In Gold?)

Top Gold ETFs Vs. S&P 500
ETF Trailing %
(Year to Date)
PowerShares DB Gold
(AMEX:DGL)
-13.98%
SPDR Gold Shares
(AMEX:GLD)
-12.37%
iShares COMEX Gold Trust
(AMEX:IAU)
-11.95%
- -
SPDR S&P 500 Index ETF
(AMEX:SPY)
-43.40%



Recent Movement
Gold futures prices traded at a record $1,032.70/oz in March while the US Dollar Index bounced around $72.00. The market was absorbing the effects of falling housing prices, tightening credit markets and write downs from large U.S. banks related to subprime mortgages and the tight credit markets. The Fed was also ramping up its plan to slash interest rates to help prop up the economy. (Don't miss The Federal Reserve's Fight Agsinst Recession.)

November futures prices for Gold were traded up nearly 2% to $748.60/oz on Thursday, November 20, as the Dow closed down 5% for the day. Gold's inverse relationship to the U.S. dollar may be tied as much to the fundamentals of inflation as it is to emotional feelings of market uncertainty.

Inflation Note
Inflation in the form of rising consumer prices makes gold attractive because it can hold its value when the U.S. dollar's strength fades. However, with oil prices falling below $50 per barrel and with governments around the world cooperating to reduce interest rates in order to repair the global economy a period of disinflation or even deflation could take the shine off gold investments for the near future.

The Rub
Foreign countries have continued to show their faith in the U.S. dollar by investing in its short-term debt securities. In September, China overtook Japan as the largest holder of U.S. Treasuries. The U.S. has been able to meet its financing needs by borrowing from foreign countries, but investor should consider what would happen to the value of the U.S. dollar if the Treasury buyers decide to invest their capital elsewhere in search of a better rate of return. If this were to happen especially at a time when the U.S. was in need of additional financing from the debt markets the U.S. dollar could lose its regained swagger and revisit the low levels recorded earlier this year.

Final Thoughts
Gold may have further to fall in the near term if the U.S. dollar maintains its strength. Gold prices averaged $695.39/oz last year and $444.74 three years ago. Investors have time to gather their response to a strong U.S. dollar keeping in mind the opportunity presented by the gold ETFs mentioned above.

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