Gold ETFs Fall, But Bound To Rebound, Say Experts

Gold may have been down today but experts believe that gold is bound to rebound. According to one expert the events in Europe, budget problems in the US, debasement of currencies by central banks and diversification of emerging markets will all support gold's long term growth.

Posted 10-4-11 at 05:05 PM ET

Gold lost its luster as a so-called safe-haven investment after crashing alongside the market over the past month. Traders who used it to hedge stock holdings got burned from both ends. SPDR Gold Shares (GLD) has tumbled 16% from its 52-week high while SPDR S&P 500 (SPY) has fallen 20% from its high, briefly reaching bear market territory on Tuesday. GLD fell 2% Tuesday even as the major averages soared late.

But gold bugs contend that the yellow metal is bound to rebound and now is the time to pull a Warren Buffett: "Be fearful when others are greedy. Be greedy when others are fearful."

"Do not get caught in the exuberance or pessimism of short-term movements, even if they're sharp," Peter Schiff, CEO of Euro Pacific Precious Metals, wrote in a client note this week. "Observe the fundamentals: the events in Europe, the looming budget calamity in the U.S., central bankers' steadfast strategy of debasement, and emerging markets' continued diversification into precious metals. These are the main drivers for gold's long-term appreciation."

Compared with most commodities and the stock market, gold's pullback is moderate. iShares Silver Trust (SLV) has melted 41% from its 52-week high from April. PowerShares DB Commodity Index Tracking (DBC), which includes grains, metals and oils, has plunged 20% from its one-year peak. On a 12-month basis, gold is ahead 19% while the S&P is down 6%. DBC is up just 3%.

Looking back the past three years, gold has returned 86%, dwarfing the S&P's 5% gain and a 13% loss in DBC.

"The 16% decline in the gold price since Labor Day has been the biggest decline since 2008, but actually it's been a moderate one considering the rise," said Pamela Aden of the Aden Forecast. "The pressure is still down and it could go lower. ... But once this weakness is over, we believe the bull market will continue rising to record highs once again."

Credit Suisse projects gold could reach $2,000 an ounce in 12 months, which would translate to $200 a share for GLD.

"Gold at $2,000 is absolutely, potentially on the uptrack, despite the sell-off," said Marcel Kreis, Credit Suisse's head of private banking for Asia-Pacific, at the Reuters Wealth Management Summit in Singapore on Monday.

Wealthy people should buy gold as it has become an attractive investment following last month's sharp reversal, Kreis says.

Gold may consolidate in a trading range for several months before resuming its uptrend, experts say. It tends to form rounded bottoms and spiky tops, unlike stocks, which tend to have spiky bottoms and rounded tops. Unlike most stock indexes and commodities, GLD still trades above its long-term 40-week or 200-day moving average. It must break below that key support level to confirm a downtrend.

Dennis Gartman of the Gartman Letter has allocated 10% of his portfolio in gold this month on the expectation that Europe will have to print more money to deal with the credit crisis, thereby devaluing the euro.

"Europe is about to embark upon its own QE I and QE II, and that is the lesson of the strength in gold despite the weakness of the euro and despite the strength of the U.S. dollar," Gartman wrote in his daily client note. "It is quantitative easing or chaos; your choice!"

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