NEW YORK ( ETF Digest) -- With inflation pressures either rising or falling, the dollar can be negatively or positively affected. Precious metals, particularly gold, have acted as a hedge against the decline in purchasing power due to a declining dollar. Therefore, most investors have sought refuge using precious metals. Currency debasement and paper money in general have thus caused gold and other precious metals ETPs (ETFs & ETNs) to become an essential part of any portfolio. The issuance of a wide variety of precious metals based ETPs has made adding these to portfolios relatively easy. Previous to their existence, it was cumbersome, time-consuming and off-putting to deal with these products for most investors. Then you either bought gold coins, ingots, futures or options, and, when all else failed -- gold stocks. Gold coins are an inefficient market with illiquidity and serious price spreads for buyers and sellers. Futures and options involved more leverage, qualified investors and a lot of paperwork not to mention more trading.
Easy monetary policies which began shortly after the equity market dotcom collapse (2000-2003) combined with the launch shortly thereafter of GLD in November 2004 (IAU shortly thereafter January 2005) gave us our first precious metals products. Here, we finally had a simple way to deal (buy or sell) gold in an unleveraged security with low costs and good liquidity. The financial crisis of 2008 and beyond led to central bank ZIRP (Zero Interest Rate Policies) and QE (Quantitative Easing--or, money printing) which left the value of the dollar as the primary casualty. To gain protection it was essential investors would gravitate to gold and other precious metals. As a result since the launch of GLD along with easy monetary policies, the ETF has gained 263%.As this is written, gold prices are under heavy selling pressures which began in September 2009. Then as now, hot money seems to be leaving gold in favor of common stocks. But, we've experienced similar and greater percentage declines previously. The U.S. Fed is determined to keep interest rates low through 2014, and despite better recent economic data, some argue more QE is on the horizon. All this said, gold (the "barbarous relic") has been valued by people globally for thousands of years. It and other precious metals will wax and wane along with economic conditions going forward. As a former CTA (Commodity Trading Advisor) and CPO (Commodity Pool Operator), I know the value of having an allocation to direct precious metals markets. We were involved with trading precious metals futures in the late 1970s when price spikes in gold and silver took place as well as their dramatic decline. As with previous ETF issues our technical analysis methodology involved using evaluating monthly charts but we also utilize weekly charts to fine tune positions. The latter circumstance is due to the unique nature of commodity contracts. Most futures contracts to which ETF / ETNs are linked expire quarterly. To be effective, direct commodity investing requires investors to be more active although investors in gold in particular view the asset now as a long-term hold. Nevertheless, we're willing to trade them with the trend being out sometimes when it was more prudent to stay in with hindsight. We do this because we've seen large price changes over the years and remaining sanguine about this sometimes isn't an option. Therefore, it pays to be active and utilize a combination of weekly and daily technical charts to manage risk.Four risk factors should be considered:·The CFTC's varying considerations regarding commodity position limits as applied to the assets of ETF and ETNs--still in limbo.·Commodity exchanges may raise or lower margin requirements to limit speculation which has a substantial indirect effect on ETPs.·The credit quality of ETNs given these are "notes" many guaranteed by Barclay's and Deutsche Bank.·Backwardation (back month contracts lower than front month) and Contango (back months higher than front month) can negatively affect contract rollover for investors. ·Since most commodities trade in dollars, the value of the dollar can positively or negatively affect price behavior. ·Frankly, the rise in many precious metals, particularly gold, is much disliked by the powers that be since it's a negative vote by investors on their stewardship of fiscal and monetary conditions. As a result, they may take actions to restrain price rises where and when they can. In this regard, the Fed may do so by allowing interest rates to rise.ProShares, Direxion Shares and Deutsche Bank feature inverse and leveraged long/inverse ETNs for those investors wishing to hedge or speculate. We feature a technical view of conditions from monthly chart views. Simplistically, we recommend longer-term investors stay on the right side of the 12-month simple moving average. When prices are above the moving average, stay long, and when below remain in cash or short. Some more interested in a fundamental approach may not care so much about technical issues preferring instead to buy when prices are perceived as low and sell for other reasons when high; but, this is not our approach. Premium members to the ETF Digest receive added signals when markets become extended such as DeMark triggers to exit overbought/oversold conditions. On occasion we combine weekly chart views to fine-tune our positions. Uniquely, we also remain aware of conditions with exogenous events (central bank policies, geo-political conditions and so forth.)