Gold ETF's - good time to exit

Gold touched a fresh high of $ 1,913 an ounce in Asian markets today thereby indicating an YTD return of a whopping 37%. Gold prices, exactly 20 years ago on this date, were quoting at around $ 354 an ounce. What a rally it has been for the yellow metal which has won the confidence of scores of investors. While new investors and speculators are still eyeing it to make a quick gain, conservative players have started raising an alarm.

The recent rally in Gold prices is mainly due to the US crisis (downgrade from AAA to AA+ and a slowing economy) and the Euro crisis (defaulting EU zone economies like Greece, Spain & Italy). which has left global stock markets tumbling (refer my previous post in this regard). These are the 2 main factors which diverted investor interest to Gold, which is considered to be relatively safer than the stock markets. But I feel investors need to be cautious at this stage. They should keep in mind that there is nothing like a risk-free market. Recall that Gold had crashed to about $260 an ounce after hitting a peak of $ 850 in 1980. I agree with William Bernstein of Efficient Frontier Advisors, USA that whenever an asset gets securitized, that tends to raise its price level in the short term and lower its expected returns in the long term. The influx of new investors, he explains, gives a quick boost to returns, but the sudden surge of popularity then raises prices so high that future gains are harder to sustain.

So how long will this rally continue? I think it’s a short term phenomenon which might last for another 6-8 months. Once the world markets stabilize and global economy revives, money should move out of Gold which would lead to a substantial drop in prices. As far as investment perspective is concerned, I sense a correction soon. For those who had bought ETF’s at far lower prices, this might be a good time to exit & book those gains. For those who are looking to enter, a bit of a wait is recommended.