Are Gold ETFs Trapped In A Bubble?

Gold and its related exchange traded funds (ETFs) are once again surging in popularity, which leads to the inevitable question: is this a bubble?

Gold is extremely popular right now as an investment, thanks to its inherent haven-like qualities and its ability to move opposite from the general market. The interest in gold has been firmly established based on recent market activity, but will this create a bubble that could burst and leave investors soaked?

While gold can be a great bet for investors looking to create a safety net and hedge against inflation in their portfolios, Brett Arends for The Wall Street Journal reports that there are several reasons investors should be cautious when considering a gold investment:

• Nobody really knows what the metal is worth. It does not generate income and any gains come from capital appreciation.
• Investor inflows and outflows over time show that money flows into gold ETFs are ill-timed.
• The World Gold Council, an industry body, reports that Asian investors were actually net sellers during the first quarter, while Westerners bought heavily and sent prices soaring.
• Although relished as a safe haven, the volatility in gold is questionable for safety.

Don Dion for TheStreet explains that while investors focus on the actual metal, the gold mining stocks actually get ignored, even though they’ve been outperforming the metal so far this year. This can present opportunity, especially while inflation fears are fresh. While gold miner stocks can be twice as volatile as gold prices, investors have been willing to brave the risk/reward scenario for the potential upside in 2009.

How can you avoid a bubble? Read on. Protect yourself from volatility by having a strategy; we use the 200-day moving average as a guide of when to get in and when to stay out.

• Market Vectors Gold Miners (GDX): up 20.8% year-to-date

• SPDR Gold Shares (GLD): up 8.3% year-to-date

• PowerShares DB Gold (DGL): up 7.9% year-to-date

For full disclosure, some of Tom Lydon’s clients own shares of GLD.

Subscribe by RSS Subscribe by Email