Home > management, Markets, trading > Profitable ETF Trading Strategies: reflecting on the gold ETF

Profitable ETF Trading Strategies: reflecting on the gold ETF


 There are two ETFs that focused directly on gold, the commodity. The first one has a symbol of GLD and is by far the most heavily traded of the two ETFs, probably because it was the first one to market. The second symbol is IAU. These two ETFs trade so closely together that it would be hard to fit a razor blade in between them. 

Gold has always been a popular hedge and an alternative investment asset through the years. More than other commodities it also has attracted various groups of true believers, various conspiracy theorists whose life seems to revolve around discovering secret alliances of international bankers who work tirelessly to artificially keep the price of gold low. You can find these discussions on Yahoo discussion groups at your leisure. 
 
It is true that many people consider gold as a hedge against inflation because there is a finite amount of gold in circulation and storage. We know the rate at which new supply is mined and we can predict with some certainty the consumption of gold for jewelry and other industrial uses. 
When you see the US government printing trillions of new dollars of fiat money, there is a natural inclination to look to gold as a store of value. For reasons I cannot explain there is no direct correlation with the price of gold and the rate of inflation. This is probably due to the buying and selling of gold by institutional money. 
 
For purposes of this essay I just want to look at GLD as a trading vehicle choice. 
 
It is one choice among many in the commodity area and in equity markets in general. I am neither competent nor interested in trying to uncover the true secret of gold price variability.
 
The only thing that I focus on instead is examining price performance and looking for opportunities to achieve favorable reward to risk ratio trades in the same way that I look at all ETFs. I find this approach allows me to find trade setups that fit within my parameters for risk and reward. 
 
In the last year or so it may surprise you to find out that the volatility of gold has been as little as one third of that of the broad market index, the S&P 500. In fact you could probably win money by asking people which they thought was more volatile: the stock market or gold.
 
This relative volatility of gold goes through cycles however. There are times when it is more volatile than the market. So the truth about gold as far as I can see is that it goes through cycles just like every other sector as a class and must be studied constantly to find those moments trading parameters. 
 
The one thing you can count on is that gold will continue to fascinate and delight traders and investors for years to come and this will create opportunities for effective traders living in the buying and selling at appropriate times. Remain calm, all will be well.
 
Gold will continue to provide opportunities for agile traders. The use of the ETF is a cost effective and time efficient way to participate in the opportunity without the issues of storage, accountability and liquidity.
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