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Sam Subramanian

2017 Outlook for Gold Mutual Funds and Gold ETFs

Sam Subramanian PhD, MBA

Gold has taken a topsy-turvy ride in 2016 after losing nearly 37% of its value from 2013 through 2015.

The precious metal enjoyed a good first-half from strong investment demand. Institutional investors were particularly concerned about global central banks using extraordinarily accommodative monetary policies including negative interest rates to stem slowing economic growth.

Gold's moment of glory in 2016 came when money inflows into SPDR Gold Shares ETF (GLD) spiked after the United Kingdom voted to leave the European Union following the June 23rd referendum.

The price of gold was up 25% through June 30. Stocks of gold mining companies prospered even more. Shares of Newmont Mining (NEM) and Barrick Gold (ABX) were up 117% and 189%, respectively for the 6-month period.

Mutual funds and ETFs that invest in gold mining stocks were topping the Y-T-D performance charts at the mid-year point. Fidelity Select Gold (FSAGX) and VanEck Vectors Gold Miners ETF (GDX) were up 91% and 102%, respectively. VanEck Vectors Junior Gold Miners ETF (GDXJ) that invests in small gold miners advanced 122%.

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After surging in the first-half of 2016, gold and gold stocks lost most of the gains in the fourth quarter as U. S. interest rates rose and the dollar moved higher.

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Gold, however, lost its luster after a relatively eventless third quarter. Comments from Federal Reserve officials on the need to raise U. S. short-term interest rates weighed on gold. Downward pressure on the yellow metal's price gained momentum after the U. S. presidential election on November 8.

Money flowed out of gold ETFs after Trump's election victory. Investors perceived U. S. economic growth would benefit from tax cuts and infrastructure spending increases promised by Trump. The rise in bond yields and the surge in the U. S. dollar weighed on gold.

Arguably, gold received its final punch for 2016 from the Federal Reserve on December 14. The central bank raised the benchmark federal funds rate by 0.25% and signaled three more upticks in interest rates in 2017.

As of December 23, gold's advance for the year had been trimmed to just 6%. Gold stocks too surrendered most of their first-half gains to trim the advance for Fidelity Select Gold and VanEck Vectors Gold Miners to 35% and 41%, respectively.

Should You Own or Avoid Gold Mutual Funds and Gold ETFs in 2017?

Since November, investors have focused on what can go right with Trump's election. They expect tax cuts, infrastructure spending, and deregulation to boost the economy, push up interest rates, and strengthen the U.S. dollar, all of which can negatively impact gold.

The popular view, however, ignores Trump's election promises which can potentially hurt U. S. economic growth and increase inflation. Trump and his advisors have called for more trade protectionism including imposing a 10% tax on imports. Such measures, if pursued, would make access to low-cost imports difficult and increase inflation. Economic growth could suffer if other countries retaliate with protectionist measures and impose restrictions on U. S. exports.

The popular view also shows little concern for how quickly and successfully Trump can deliver on his promises. For one, Trump can expect some resistance from Congressional leaders reluctant to widen the budget deficit. It is entirely conceivable Congress may water down tax cuts or prevent the infrastructure spending boost proposed by Trump.

Looking at the global picture, geopolitical risk in 2017 could well be higher than in 2016. Results of the Brexit referendum in the U. K. and the Presidential election in the U. S. shows the rise of the populist movement on both sides of the Atlantic. Investors are on watch to see if the anti-European Union movement gains momentum in Europe. Uncertainty on this front is likely to increase in 2017 as France, Germany, and the Netherlands go to the polls next year.

The key issue for investors in assessing the outlook for gold, gold mutual Funds, and gold ETFs is whether they can offer a worthwhile hedge to the implementation protectionist trade measures in the U. S. and a rise in anti-EU movement in Europe.

As shown in the chart below, the appeal of gold as a safe-haven had diminished in years immediately following the 2008 financial crisis. Gold stocks, and to a lesser extent gold, moved in tandem with U. S. stocks from 2009 to 2013.

Performance quotations from investors using fidelity mutual funds model portfolios

After moving in tandem with U. S. stocks for nearly five years following the financial crisis, gold has regained its safe haven appeal as the correlation of gold and gold stocks with U. S. stocks has turned negative.

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The normal inverse relation between U. S. stocks and gold has returned since then to restore gold's safe-haven virtue. Statistically speaking, the correlation between U. S. stocks & gold and U. S stocks & gold stocks has been most negative in 2016, compared to all years since the financial crisis.

U. S. stocks are likely to react negatively to the implementation of protectionist trade measures, & delays in implementation of meaningful fiscal stimulus in the U. S. and a rise in anti-EU movement in Europe. Concern about the outlook for economic growth in the U. S. is also likely to cause the dollar to decline against foreign currencies as the Federal Reserve slows the pace of monetary tightening.

Continuation in the inverse relation between U. S. stocks and gold & gold stocks should help the latter in offering an effective hedge should U. S. stocks decline.

As such, it makes sense for investors to allocate 5% to 10% of monies to gold or gold mutual funds and gold ETFs. This would help investment portfolios to hold up better in 2017 if scenarios largely ignored by the popular view today come to fruition next year.

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AlphaProfit's ValuM investment process blends fundamental and technical factors to consistently choose the best Fidelity Select funds and the best sector ETFs.

Compounding at an annual rate of 19.0%, a dollar invested in AlphaProfit's selection process in 1994 is now worth $54.19 while a comparable investment in the S&P 500 is worth just $7.63.

Consistent selection of winning mutual fund picks has enabled AlphaProfit's Premium Service to rank #1 consistently in Hulbert Financial's investment newsletter rankings.

AlphaProfit will reposition its Fidelity and ETF model portfolios with best sector funds and best ETFs for the current market environment on December 30.

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AlphaProfit MoneyMatters is a free e-letter distributed to registered users of AlphaProfit's website. The e-letter analyzes the economy, markets, and sectors and provides money-making insights on stocks, exchange-traded funds, and mutual funds. AlphaProfit MoneyMatters is edited by Dr. Sam Subramanian acclaimed for his financial acumen and analytical skills.

AlphaProfit Investments, LLC is an independent investment research firm based in Sugar Land, TX. AlphaProfit publishes the AlphaProfit Sector Investor's Newsletter, edited by Dr. Sam Subramanian. Leveraging sector funds, the Newsletter provides high-performance model portfolios with Fidelity funds and exchange-traded funds. It also includes actionable stock recommendations. This newsletter features among MarketWatch's top 10 investment newsletters and has won the coveted #1 rank from Hulbert Financial several times.

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