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SPDR Gold Trust (ETF) (GLD): Why Gold Is Making a Comeback

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Goldis having a summer revival.

The price of gold touched $1,420 an ounce this week, a 3.5-month high, as escalating tensions in the Middle East, volatile currency markets and renewed demand for jewelry in China and India pushed prices higher.

Gold has surged 15% since sinking to $1,212 an ounce, its lowest level in almost three years, on June 27. A gain of 20% or more would put the metal back in a bull market.

Gold’s resurgence follows a rough ride this year.

Gold slumped 4.8% in the first three months of 2013 as the outlook for the economy improved while inflation remained subdued.


For many years prior to that, large investors, like hedge funds, bought the metal as a way to protect their investments against rising prices and a slumping dollar. They feared that the Federal Reserve’s stimulus program could cause prices to rise. But inflation remained subdued and that reduced the need to buy gold. Also, signs in January that the dollar was strengthening diminished the appeal of owning gold.

Then in April, the bottom fell out. A proposal that Cyprus sell some of its gold reserves to support its banks rattled traders, prompting concern that Spain, Italy and other weak European economies might also sell and flood the market.

Gold plunged by $140 an ounce, or 9%, on April 15 as investors unloaded their holdings. That was the biggest one-day decline in more than 30 years.

While the price of gold is still down 17% this year, the metal is on the rise.

Here are the factors driving its comeback:

A little insurance
One of the reasons people buy gold is that it offers an alternative to more traditional financial assets, says Mike McGlone, director of research at ETF Securities, a provider of commodity-based exchange-traded funds. When financial markets get jittery, investors often buy gold because it is considered one of the safest assets that can easily be converted to cash.

As the stock market soared this year, rising as much as 20%, investors had less need to hold gold.

That has changed the last four weeks.

10-gram gold bars with a purity of 999.9, pressed and stamped with the “Emirates Gold” company logo. AP Photo/Kamran Jebreili, file

The Standard & Poor’s 500 index has lost 4% since reaching an all-time high of 1,709.67 on Aug. 2. Traders are concerned about when and by how much the Fed will pare back on its stimulus, a major driver behind the market’s rally.

Strife in Egypt and Syria has also reminded investors that it’s a dangerous world out there: Wars can spread and oil prices can spike, hurting economies and stock markets.

Investors want to add back a little insurance to their portfolios these days.

“If we lived in a perfect world, we would not need gold,” says McGlone. “But since we don’t, we do need something that is the ultimate store of value.”

Investors don’t need to buy gold bars or coins to invest in the metal.

Exchange-traded funds are investments that are similar to mutual funds. Both can be bought and sold on exchanges. Some of these funds, such as ETFS Physical Swiss Gold Shares and SPDR Gold Trust (ETF) (NYSEARCA:GLD), allow investors to buy into trusts that invest directly in gold.

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