SPDR Gold Trust (NYSE: GLD) experienced a major pullback on Leap Day this week, dropping almost exactly 100 points on the day.
This happened while the European Central Bank (ECB) offered its second tranche of three-year Long Term Recapitalization Operations (LTRO).
The sell-off in gold on Wednesday is a related sign that liquidity is currently in demand.
But you only have to look at gold's big move up since the start of 2012 to know this stage of the move was unsustainable short-term.
It's why investors shouldn't be surprised by the pullback, and should use this latest move down to increase their long-term exposure to gold.
This dip is a buying event and nothing more.
The pullback in the price of gold also hit equities along with bonds and some other commodities.
Even so, it appears that the ECB has provided enough liquidity to fight off the near-term fears.
Once these funds begin to work their way through the system, I believe they will be bullish for commodity prices.
Over time, banks will eventually put that capital to work, with an eye toward generating a positive rate of return on it. One of those avenues will undoubtedly be gold.
Here's why, along with a bit of background.
I'm Still Bullish on Gold
The global economy is not easy to beat on a consistent basis. It's why professional money managers privately share economic research and theories.
I'm blessed with an inbox full of these items and speak with many of these same money managers on a regular basis.
One of them is a friend we'll call "Unsure."
When he isn't living in some exotic locale, he can be found in Brazil. Having spent a significant time in Europe and in the US, he is worldly to say the least.
"Unsure" is the definition of a globally aware investor and yet, in my opinion, he has a weakness: He hates the US dollar long-term.
In fact, we regularly have mocking sessions in private, as he vents about the latest lunacy infecting the global reserve currency.
"Unsure" also jokingly prides himself on being a horrible market timer, which means he probably has been burned trying to time certain markets recently.
So here's the reason for the backstory....
"Unsure" was pondering buying dollars and lowering his gold exposure – even though gold is normally one of his favorite investments.
So when he's looking to switch his bias, even only for the near-term, I pay attention.
However, I hope he doesn't take this story about advice on gold wrong. (I'm sure he'll read it and we can have another jovial chat.)
What "Unsure's" fear of gold tells me is that this move isn't over.
While the dollar had a huge one-day move up, I expect gold to continue outshining its fiat brother. So let's fade his exit and buy this dip.
Going Long the SPDR Gold Trust (NYSE: GLD)
On the current pullback, it's time to buy SPDR Gold Trust (**) - The drop has been too fast, hard and focused not to be a raid.
You see, SPDR Gold Trust:
- Prices in electronic equity ounces
- Has a lower exposure cost than physical gold
- Offers market liquidity
One of the reasons I like GLD here is it gives us instant access to gold equivalent prices.
It represents 1/10 of one ounce of gold per share, or 10 shares per ounce. For investors who want exposure to gold but don't have enough funds to buy and sell in physical markets, buying shares of GLD allows exposure to physical gold's movements.
The ETF shares give investors a way to quickly trade in and out of physical gold because there's no way a physical-only investor can catch market moves the way those owning shares of GLD can.
The SPDR Gold Trust shares are brought to market by the State Street Global Advisors fund family. The ETF was launched on November 18, 2004 and has over $71 billion dollars in assets under management.
Action to Take: Buy SPDR Gold Trust (NYSE: GLD). (**) The hard, sharp pullback in gold prices in one day has left some people wondering if the run in gold is done. I don't believe so. I am still bullish on gold. Gold prices have and should continue to climb to new highs over the medium term as central bankers, specifically the ECB's LTRO, flood the world with new liquidity measures. While these events might cause a short-term pull back in prices, we should continue to use these dips to dollar cost average into our longer-term holdings.
(**) Special Note of Disclosure: Jack Barnes has no interest in SPDR Gold Trust (NYSE: GLD).
Author's Note:
Dear Reader,
After managing my own hedge fund to double-digit gains in the dark days of 2008, I decided to retire to a beach to write about the markets instead.
But no matter how much I love writing, I love the investment world even more.
Today, I'm happy to announce JHB Capital LLC will be opening soon. As a result, the team at Money Morning has agreed to release me from my contract at the end of March, so I can again focus on clients' expectations.
I'd like to thank all of the editors at Money Morning. Each week they allowed me to say what I thought, when I thought it. This was a rare treat, and one that I have enjoyed.
I'd also like to thank all of my faithful readers. You've given me more than you'll ever know.
Money Morning Global Macro Trends Specialist Jack Barnes started his career at Franklin Templeton in 1997. He started out in the company's fund-information department - just as the Asian contagion infected the Asian tiger countries. Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008. Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian."