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Are GLD and SLV ETFs Good Proxies for Gold and Silver Bullion Investing?

Commodities / Gold & Silver 2009 Dec 11, 2009 - 12:43 AM GMT

By: Nadeem_Walayat

Commodities

Best Financial Markets Analysis ArticleThis analysis takes a look at the trend relationship between Gold and Silver their respective ETF's as the next in a series of articles as part of my unfolding inflationary mega-trend scenario that I intend on completing before the end of December which will be published as an ebook that I will make available for FREE. Ensure you are subscribed to my always free newsletter to get the latest analysis in your email box and check my most recent analysis on the probable inflation mega-trend at http://www.walayatstreet.com


My recent analysis on Natural Gas and UNG ETF (22 Nov 2009 - Natural Gas Screaming Long-term Inflation Mega-trend Buy, But UNG...) concluded:

The second chart illustrates that there exists a perpetual tendency for the ETF to under perform the futures over time, which deploys a similar trick to the Leveraged ETF's in utilising % of daily movements. What this means is that UNG IS NOT A GOOD LONG-TERM INVESTMENT ! If you invest in UNG, you have to get your timing right, else TIME will erode the value of your investment even if Natural Gas DOUBLES in price! However on top of this we have PROFITS which are SKIMMED from investors as indicated by UNG that FAILS to rise when the Natural Gas price goes up!

This analysis continues the study of the price trend relationship between Gold : GLD and Silver : SLV as part of the inflationary mega-trend investing as the following graphs illustrate:

Both graphs show that during the past 3 years and at the present time, the spot prices of Gold and Silver are highly correlated in terms of trend with their GLD and SLV ETF equivalents for a similar period of time.

ETF Expenses

Investors should note that both GLD and SLV ETF's deduct annual expense ratio's of 0.4% for GLD and 0.5% for SLV which over time will erode the value of the funds and result in a significant discount to the spot price for investments spanning several decades, though it should also be noted that the expense ratios compare favourably to the fees charged for bullion storage that can amount to more than 1% per annum. For instance Gold is up approx 20% over the past 12 months, against the expense ratio of 0.4%, therefore is not of any real significance for medium term investments (upto 5 years).

ETF Risks

I understand that a number of rumours are doing the rounds during the past few weeks of potentially 1.4 million fake tungsten gold bars in existence, of which many form part of the GLD ETF holding.

However the GOLD:GLD price trend relationship suggests that there is no substance to these rumour's for if these rumours were true then GLD would be trading at a significant discount to the spot Gold price. Though that it is not to say that some future event may bring about such a large discount.

Leaving aside the risk of fake gold, there is also the risk of that during a currency crisis the U.S. Government seizing the Gold held in New York, maybe if it were disbursed across several vaults in several countries this would ensure greater security. Other risks exist as with all ETF's i.e. that of the risk of theft and fraud.

Though as I have pointed out earlier, if in the future a problem with the GLD and SLV did start to occur, we would see it manifest itself in the spread between GLD and Gold, as the smart money would start to exit the fund first.

Recent articles on the unfolding inflationary MEGA-TREND outlook include :

Source:http://www.marketoracle.co.uk/Article15722.html

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-09 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 400 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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Comments

Michael Crofts
11 Dec 09, 05:46
GLD SLV Etfs

Excellent article - I have never liked these commodity ETFs they are almost as bad as the ultrashort ETFs.

I use Bullionvault myself and Goldmoney is another possible investment medium. What do you think of these? They are a bit expensive for short-term trading but if you follow the larger moves (and predict them correctly!) they are reasonably efficient, and in the case of Bullionvault you are supposed to actually own your own gold. I have been in for a year now and it seems to work fine, but so far I haven't sold up and asked for my money back so only time will tell.

I understand why you don't like UNG but please would you say what you do think might be a way to play the long-term mega trend in natural gas? What about BG Group plc [UK:BG (LSE)] or Statoil Hydro [Oslo Børs: STL New York stock Exchange: STO Reuters: STL.OL Bloomberg: STL NO]? Or is there a way of buying energy futures that is accessible to private investors?

Or do you deliberately not comment on individual stocks and shares, just ETFs?

Best wishes

Michael Crofts


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