The Glitter of Gold Investing

For thousands of years gold has been an important commodity as well as storage of value, and some of the earliest forms of currency were minted gold coins. Even with the paper currencies of today, many countries still back the value of their currency with gold reserves held in their central banks. Gold also has significant world demand as a physical commodity, in a time of decreasing availability. Creating additional supplies of gold requires very expensive mining operations that have to search for a commodity that is becoming scarcer, as more of the worlds gold resources are depleted. Let’s review the pros and cons of investing in gold:

BENEFITS:

• Gold is viewed as a safe haven – in times of crisis many investors and global institutions seek out gold as a safe haven to preserve value. Gold has backstopped many currencies over the last century and is still viewed by many as the original store of value. Most central banks hold large reserves of gold to provide confidence in their paper currencies.

• Gold is a real store of value – unlike most other investments gold has a tangible value accepted by global markets, and has no market risk, credit risk, or liquidity risk associated with it. It also has demand as a physical commodity that is rising, coupled with a shrinking finite global supply, which is getting costlier to extract and mine.

• Gold is a hedge against inflation – gold protects wealth against the destructive effects of inflation. If you adjust purchasing power for the effects of inflation, gold has maintained its purchasing power over hundreds of years, whereas paper currencies have experienced a significant devaluing effect.

• Gold is a hedge against paper fiat currencies and a backstop of value for government issued paper currencies. It was not too long ago that major paper currencies were backstopped by gold and many investors and economists still view gold as the global international currency.

• Gold has commodity value and is used in many tangible products and industrial processes. As demand for these products and processes increase, the demand for gold rises.

• Gold has a limited physical supply and is a resource that is becoming scarcer to locate and extract from the ground. Global gold demand is already starting to outstrip the production and finding of new gold resources and this supply constraint has the effect of increasing and supporting the current price of gold.

  RISKS:

• Gold is a cyclical investment that has dramatic and long-lasting peaks and troughs in its price. For many years gold was an outcast and drifted aimlessly in a trading range

• Gold does not pay interest and has the risk of volatile price changes

• Gold does not pay a dividend and actually costs money to hold as an asset.

• Gold bullion requires physical security and storage costs and can be a difficult investment to transport and protect in larger quantities.

Gold ETFs are one of the best investment funds you can use to easily add gold exposure into your investment portfolio and they have several advantages over gold mutual funds, gold stocks, and speculative resource penny stocks. Investing in gold sector stocks is now most commonly done with Gold ETFs — you can gain instant exposure to many gold industry company stocks or even gold bullion using Gold ETF funds.

There are several gold exchange traded funds available, and most give you direct exposure to gold and offer a level of diversification similar to buying a basket of gold mining stocks. There are several reasons why gold could form a part of your asset allocation, however, knowing the right time to invest in the gold sector will be the key to your investment success. Let’s discuss the pros and cons of the 10 gold trading strategies we can use with ETFs.

#1. Bullish Gold ETF Trading Strategies

This is probably the most basic strategy people consider when gold prices are expected to rise. There are several bullish ETFs to consider, some focus on different parts of the gold sector and some even provide leveraged exposure to gold price movements. Use bullish gold trading strategies in times of inflation, global and financial crisis, and when there is rising physical demand for jewelry and industrial gold supplies. Here are the most popular bullish gold exchange traded funds:

• GLD – StreetTRACKS Gold ETF — invests in a basket of gold mining stocks

• IAU – iShares COMOX Gold Trust ETF — invests directly in gold bullion

• SGOL – ETFS Physical Swiss Gold Shares ETF — tracks gold spot price

• SPGH – E-TRACS S&P 500 Gold-Hedged Index ETN — S&P 500 return hedged against gold

• UBG – E-TRACS CMCI Gold ETN — basket of forward gold futures expected returns

• AGOL – ETFS Asian Gold Trust ETF — tracks gold spot price

• GOE – ELEMENTS MLCX Gold ETN — rolling futures gold contracts

• DGL – Powershares DB Gold Fund ETF — gold futures performance

• FSG – 2x FactorShares Gold Bull / S&P 500 Bear ETF — leveraged gold spread return against S&P 500

• DGP – 2x Powershares DB Gold Double Long ETN — leveraged gold futures performance

• UGL – 2x Proshares Ultra Gold ETF — leveraged gold bullion performance

• CGL – Claymore Gold Bullion ETF (Canada — TSX) — gold bullion in CDN dollars

• HUG – COMEX Gold ETF (Canada — TSX) — gold futures in CDN dollars

• HBU – 2x Horizons BetaPro COMEX Gold Bullion Bull Plus ETF (Canada — TSX)

As you can see there are a range of bullish gold investment options with exchange-traded funds and exchange traded notes that can deliver the safety and security of investing in physical gold, with the convenience of stock shares that can be bought and sold at anytime.

#2. Bearish Gold ETF Trading Strategies

Shorting the gold sector is now as easy as a regular stock trade with inversely-correlated Gold ETF funds. You no longer need to short an ETF to profit from expected downside movement, many sectors and indexes now offer an inverse or bearish version of their ETF to let you benefit from declining price movements. In addition, you can now double-down on the shorting by trading in double-inverse funds which attempt to deliver twice the downside shorting return. Here are the most popular bearish gold exchange traded funds:

• DGZ — Powershares DB Gold Short ETF – uses derivative Exchange Traded Notes to deliver the inverse return of gold

• DZZ — 2x Powershares DB Double Short Inverse Gold ETF – uses derivative Exchange Traded Notes to deliver 2x inverse return of gold

• GLL — 2x Proshares Ultrashort Inverse Gold ETF — uses derivatives to attempt to deliver 2x the inverse return of gold

• HBD — 2x Horizons BetaPro COMEX Gold Bullion Bear Plus ETF (Canada — TSX) — uses derivatives to deliver 2x the inverse return of gold

Investing in bearish inverse ETFs involves a higher level of risk due to the underlying derivative investments and volatility used to approximate the negative-correlated returns. Inverse ETFs are best suited to short-term trades involving a few weeks or months and are not recommended as long term investments due to index tracking errors and volatility.

#3. Dollar Cost Averaging Strategies

Investing in gold with a dollar-cost averaging strategy is useful when you have capital available to invest at frequent intervals (such as monthly), and you expect the price of gold to continue in an upward trend for an extended period of time. In simple terms you are buying the same dollar amount of gold ETFs each month, and as prices fluctuate you will average your cost base overtime so that you don’t invest all your capital at once price-point, reducing the chances of buying at a higher than average price.

You need to consider trading costs when practicing this strategy, and also the long-term outlook for gold. Dollar cost averaging your entry into an ETF over a period of time can increase your odds of getting an overall better cost base on your investment. You can also use the same strategy in reverse to scale-out of a position, but instead of set intervals, try to time your sales during recent short-term highs in the price of your gold ETF.

Do not use dollar cost averaging with leveraged or bearish gold ETFs due to their tracking performance errors and extreme volatility.

#4. Trend Trading with Gold ETFs

The trend is your friend when investing in the gold ETFs because most commodities have cyclical performance cycles.

ETF Gold trend trading signals simplify investing timing

Gold is a cyclical commodity so it is important to time your gold trading strategy so you are on the right side of the trend. These simple Gold ETF trend trading signals help guide your Gold trend trading strategy and keep you on the right side of the trade.

#5. Relative Strength Comparative Ranking Analysis

Investing in gold ETFs with a relative strength comparative ranking strategy is quite possibly the holy grail of ETF performance investing. As far as trading strategies go, we think this one is the grand daddy of long term investment success. The singular focus of this trading system is to compare the returns of every ETF to the market benchmark index and find the ETF that has the greatest out performance. In other words — find the best performing ETF in the market! When this ranking strategy identifies gold ETFs at the top of the ranking list it can turn into an investment home run.

The difficulty with using this strategy is the complexity of calculations that are required. In simple terms, the performance of every ETF needs to be compared to the index return to calculate the performance gap, then this needs to be repeated in a multitude of time frames, then averaged down to a comparative value, then ranked into a performance list. It takes millions of calculations to rank the ETFs in the marketplace, and required complex and expensive mathematical software algorithms. Luckily, we have a short-cut to automate this process.

The beauty of this strategy is its ability to rank the market ETFs in order of out performance to a benchmark index like the S&P 500. You’ll always know the best time to invest in gold ETFs and also when to short them, but more importantly you’ll have a guide to point your way to the best performing ETFs in any market conditions. See how gold ETFs rank in this report using this popular trading strategy .

If you would like simple Gold ETF trading strategies to follow that focus on identifying long term stock market trends you can download the 7 powerful ETF trading strategies that are the foundation of this ETF trading system.

#6. Momentum Trading Strategies

Investing in gold with momentum strategies can deliver tremendous returns if practiced well. Momentum ETF trading is a process of identifying those ETFs that have the highest inertia and are moving the fasted in one direction. Gold is a sector that often experiences rapid price movements over the span of a few months, and catching a fast moving gold ETF trade can deliver strong returns over a few short months. Trading gold ETFs with a momentum strategy involves trend analysis and relative trend strength analysis to find those ETFs that are likely to continue their fast-moving price momentum.

Technical analysis of ETF charts and careful study of price movement relative to historical norms and averages is critical to momentum analysis. Your trading time frame will also be a key determining factor of the time series you analyze. For example, momentum day trading of ETFs will examine very short time frames, often price movement bars as short 1 minute to develop their trend and momentum analysis. These trades are short and quick, and usually have limited price movement, but can often be repeated several times in a trading day. Trading costs and time commitment are significant considerations for trading short-term momentum plays.

Medium to long term ETF momentum strategies allow for significant price appreciation with limited time commitments and trading frequency costs. If you want a short-cut around all the heavy mathematics and analysis, we suggest you check out the momentum ranking of gold ETFs in this trading system .

#7. Strategic Asset Allocation

#8. Tactical Asset Allocation

Tactical asset allocation is a portfolio trading and re-balancing strategy that increases your portfolio exposure to sectors that are experiencing strong upward pricing movement. Use this strategy with gold ETFs when gold sector stocks are outperforming other major asset class sub-categories. The best way to practice tactical asset allocation is to regularly measure and rank the trend and momentum performance of all key sectors in the stock market.

When gold is performing on a relative performance basis in the top quartile of all sectors in the ranking list it is time to consider trading gold ETFs because their asset category is outperforming 75% of the stock market sectors. It is also a good idea to also confirm that gold ETFs are in a technical bullish uptrend, so that you can expect both absolute and relative performance gains (ie. you want to make sure gold is actually moving higher, not just dropping less than the rest of the stock market as can happen in severe bear market conditions).

If you would like the latest Gold ETF trading signals including long term trend signals, short term trend signals, momentum signals, market timing signals, asset allocation signals, and market strength ranking signals, download a copy of the ETF investing newsletter.

#9. Market Timing

Use market timing to your advantage when trading gold ETFs by entering gold trades when gold is most likely to experience an upward price movement. Timing the gold trade really boils down to confirming long and short term technical trends, momentum analysis, and relative strength comparative analysis to the stock market returns. You can use moving averages and stock charting analysis to visually confirm price trend actions, but just remember to use time frames in your technical analysis that match your trading horizon and expected holding periods.

Momentum and relative strength comparative analysis on gold ETFs should confirm that gold price momentum is ranking within the top 25% of all sectors in the stock market to consider trading gold, otherwise there is probably better sectors to consider trading that gold stocks. Market timing studies can help confirm leading trends as well as giving early warning signals of when it may be time to end a trade.