A History Lesson With Gold ETFs

The SPDR Gold Shares GLD, the world's largest exchange traded fund backed by physical holdings of gold, is up 15.3 percent this year. GLD is also one of this year's top ETFs in terms of new assets added.

However, some of the air has come out of the gold trade since the most recent batch of Federal Open Market Committee (FOMC) meeting minutes revealed the Federal Reserve could boost interest rates as soon as next month. Conventional wisdom says higher interest rates are a drag on gold because the dollar usually rises with rates and supposedly less riskier bonds with higher interest rates become more attractive than gold.

Indeed, GLD has tumbled 2.5 percent since the FOMC minutes were made public while the U.S. Dollar Index is flat over that period.

As is often the case when bullion and ETFs such as GLD get on a torrid pace and start hauling in billions of dollars in new assets, concerns are rising that gold's recent rebound is too much of a good thing and there are plenty of naysayers willing to chime in with a bearish bullion view.

Remembering that market history often repeats, in some form or fashion, perhaps a gold history lesson is in order. State Street, the company that markets GLD, provides that lesson, noting that the current gold environment is similar to two previous bullion bull markets – the 1970s and the early 2000s.

“The period of 1970 to 1974 marked the start of a bull market. The price of gold soared 2,317% from $35.17 an ounce on Dec. 31, 1969, to $850 an ounce on Jan. 21, 1980. What set the stage for such strong gold performance?,” said State Street Vice President David Mazza in a recent note. “Over this time period oil prices were steady, but they suddenly spiked 150% in 1974 while equities, which were rising moderately, plunged 20%. Through it all, gold began its steady march higher.” 

Gold often falls out of favor when investors chase stocks when stocks are hot, but popular equity-based broad market ETFs are dithering this year.

For gold bugs, there is nothing wrong with safe-haven demand and 2016's market action is, to this pointing, reminding investors of gold's utility. In fact, gold has proven its mettle during market crises ranging from the Soviet sovereign debt crisis to the Long Term Capital Management meltdown to the global financial crisis.

“Today, we are facing a divisive presidential election, where candidates are seizing the opportunity to posture themselves as the change that America needs. The US is once again managing a strained relationship with Russia, the situation remains volatile in the Middle East and, instead of a hostage crisis in Iran, headlines talk of terror-related kidnappings by ISIS,” adds Mazza. “One thing is identical between the two periods—extreme investor uncertainty.”