There's a new way to buy gold and diversify your exposure out of the dollar. It comes in the form of four new exchange traded funds (ETFs), using an investment approached made popular by Dennis Gartman, whose daily newsletter is a must-read among professional traders around the world.
The AdvisorShares Gartman Gold ETFs let you invest in, or trade, gold - but not just against the U.S. dollar. Three of the ETFs diversify your exposure into either the Euro, the Japanese Yen, or the British Pound. The fourth ETF allows you to diversify your gold investment into all three currencies, plus the U.S. dollar. All are traded on the NYSE. They are:
•AdvisorShares Gartman Gold/Euro ETF (NYSE Arca: GEUR)
•AdvisorShares Gartman Gold/British Pound ETF (NYSE Arca: GGBP)
•AdvisorShares Gartman Gold/Yen ETF (NYSE Arca: GYEN)
•AdvisorShares International Gold ETF (NYSE Arca: GLDE)
Using these different ETFs could add a real edge to your investment performance in gold. For example, from the peak in gold prices in August of 2011, gold is down 31 percent in dollar terms, and slightly less against the Euro, but it is down only 6.9 percent in yen denominated terms! Yes, you would still have taken a loss if you held gold vs. yen, but Gold/Yen has "outperformed "Gold/US dollars by 24 percent -- a not insignificant sum.
So it can make a big difference which currency you exchange for gold. But up until now, that strategy wasn't easily available to individual investors.
Gold as a Bet Against the Currency
Why does gold move differently against different currencies, even though the general global trend of gold prices may be up, or down? First, you have to understand why gold goes up and down in the first place. Yes, gold is a trading "commodity," subject to the volatility of big traders making big bets. But gold has also been used as a "safe haven" - a way to bet against the future value of a country's currency.
Historically, gold has kept its value when countries have "devalued" their currencies by printing so much money that people eventually realize their money is losing buying power. As an extreme example, think of the inflation in Germany in the 30's and the hyperbolical stories of people carting around wheelbarrows full of paper currency, trying to exchange it for bread.
Or think, more recently, of the money printing spree here in the United States, back in the 1970s to pay for both a new domestic policy (The Great Society) and the war in Viet Nam. By the end of that decade, Americans were aggressively buying commodities such as farmland, collectibles and artwork -- and gold, which reached a then-amazing $875 an ounce. Americans realized that the dollar didn't go as far, and those who weren't buying "stuff" demanded higher interest rates to lend or deposit money (T-bills yielding over 13 percent) to compensate for the declining buying power of the dollar!
Why Isn't Gold Soaring Now?
After five years of monetary expansion on the part of the Federal Reserve, you might be wondering why traders aren't betting against the dollar and buying gold right now. (Actually, the smart money is probably accumulating gold positions at these prices around $1300 per ounce). But gold vs. the U.S. Dollar may not be the smartest bet, especially now that the Fed seems determined to cut back on the expansion of the money supply.
Just compare our Fed policy with the monetary policy of Japan, which has announced it actually wants to encourage "some" inflation, and is actively increasing its money supply. Or compare that with the policy of Euro-land, which has just seen Germany's highest court effectively rule that it will not prevent the expansion of the Euro money supply if needed to save the countries or banks within the system. It's a green light for Euro money creation, which calls into question the future value of the Euro.
So, in effect, the U. S. dollar has itself become a comparatively "safe haven" for money from around the world. That may, or may not be a lasting trend. The United States has its own economic problems, and may have to "print" in the future to keep paying its bills. But that is a bit down the road, compared to what is going on in Europe and Japan right now.
That's why an American investor might want to buy gold in terms of the Euro, or Japanese yen, or even the British pound - or a combination of all three, plus the U.S. dollar. And that's where the AdvisorShares Gartman Gold ETFs come in.
Gartman Gold ETFs
These four ETFs trade on the New York Stock Exchange, so they are easy to buy through your broker. They are sub-advised by Treesdale Partners, a New York-based registered investment advisor, known for managing alternative strategies in the fixed income and currency/commodity space. To learn more about how the funds work, you should see their information brochures at www.advisorshares.com.
But the basic idea is that the funds buy gold futures to establish the position in gold. [Full Disclosure: I am on the board of directors of CME Group, Inc., parent company of the COMEX, the exchange on which gold futures are traded.] Then the ETF managers offset the gold futures long position by taking a short position in the futures market for the specific currency of the fund, whether Euro, Yen, or Pound. It's as if you were a European, or Japanese, or British investor, betting against your own currency and in favor of gold. You have removed your gold investment position from the realm of the dollar, or in the case of the fourth ETF, you have diversified your gold investment globally.
As Ade Odunsi, Managing Director at Treesdale, and portfolio manager for these ETFs explains: "The funds are designed to neutralize your dollar risk component. . . . so the question is which currency do you dislike most against the dollar."
Or as an old trader once told me, "Currencies may float - but they don't sink at the same rate!"
For many investors, it may be enough to buy an ETF that simply is a bet on gold vs. the U.S. dollar. The NYSE-traded GLD does just that, moving in tandem with the price of gold - in dollars. But for those who want a more diversified approach, the new AdvisorShares Gartman Gold ETFs give you a chance to target your gold investment more specifically against the currency of your choice.
And why use gold to bet against a currency? History says that governments eventually always try to "print" their way out of financial problems. But gold can't be printed. That's The Savage Truth.