Gold ETF Performance Update And Outlook

Gold ETF products remained in positive territory to begin 2012. Gold stock ETFs continued to outperform physical gold ETFs, despite a market on Friday that saw significant losses for gold stocks relative to their 2012 total return. Much of the weakness in stocks was due to S&P downgrades of nine eurozone countries, most notably France losing its AAA rating. This move will raise borrowing costs for the eurozone and stoke fears of a further slowdown in the eurozone economy. Physical gold was down slightly on this news as concerns between less consumption of gold due to an economic slowdown were balanced by other factors outlined below.

Speculation arose during the week of another quantitative easing from the U.S. Federal Reserve - dubbed QE3 - as several Fed officials have hinted at that possibility. (The next Fed meeting is scheduled for January 24-25.) Increased liquidity by the Fed, as in more dollars, would likely be a boost to the price of physical gold as gold is denominated in dollars.

Finally, the World Gold Council released data showing that China has now become the second largest consumer of gold,surpassing India through the end of the third quarter of 2011. This may be a temporary move as India experienced a large devaluation of its currency in 2011. This made gold more expensive for Indians and thus slowed the consumption of gold. Nonetheless, the rise of Chinese gold demand is notable. The speculation is that China's central bank is increasing its gold holdings given its large exposure to the U.S. dollar. In the last report in 2011, China was the seventh largest holder of gold reserves, behind countries like France and Italy.

Here's the performance chart of all gold stock ETFs in the United States. GDXJ, the junior gold miners ETF from Market Vectors remains the performance leader for 2012 and held up better on Friday than its large cap counterpart, GDX.

Click to enlarge:

Source: GoldETFs.biz.

Gold stock ETFs continued their outperformance in 2012, but can it last?

Physical gold ETFs began to close the gap in performance versus gold stocks, especially after Friday's market action. IAU from iShares continues to lead in performance, edging out the world's largest gold ETF, GLD. Here is the performance chart of all physical gold ETFs listed in the U.S.

Click to enlarge:

Source: GoldETFs.biz

Physical gold ETFs have gained around 4% in 2012 and appear well positioned given market uncertainty.

Going forward gold traders are bullish about gold prices going into next week as Bloomberg reports 18 of 23 traders surveyed believe gold prices will rise - the highest bullish sentiment in their weekly survey since mid-November of 2011. This is likely due to the continued EU debt crisis, a potential QE3, tensions in Iran and China's surge in gold buying. Chief risks to gold prices in the short term include a stronger U.S. dollar, an EU-driven liquidity crisis and sentiment that the U.S. economy is improving more significantly than expected.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.