The U.S. dollar index plunged last week to a record low – the lowest level in fact since the New York Board of Trade began calculating the index way back in 1973. It was a history making event, as my colleague Jack Crooks said; but it’s the wrong kind of history if you’ve got too much of your investments denominated in the sinking buck.
Ironically, and perhaps NOT coincidentally, the U.S. dollar index is now lower than at any time since right after Richard Nixon took America off the gold standard in 1971. Gold sold for about $40 per ounce back then, today it fetches nearly twenty-times that price, at nearly $740 an ounce.
Notwithstanding yesterday’s sell-off, which was predicated on a bounce in the buck, gold has been rallying strongly for six-straight weeks – while the greenback was grinding lower. With gold recently trading at its highest level in 27 years, it’s no surprise that investors are rushing into gold-backed investments; including gold exchange-traded funds.
Demand Surging for ETCs
In fact, the Financial Times reports that “demand for ETCs linked to gold and other precious metals is high as investors are drawn to their safe-haven qualities.” It’s ironic too, that “safe-haven” used to be a phrase describing U.S. dollar buying; but it’s not much in vogue anymore.
ETCs, or Exchange Traded Commodities are structured very similar to ETFs, but instead of holding stocks or bonds, these funds hold physical commodities or are designed to track commodity future indexes.
Lately, much of the buying interest in ETCs seems to be lining up for the funds backed by physical delivery of precious metals. According to ETF Securities Ltd (ETFS), the firm that introduced the first commodity-backed ETCs on the London Stock Exchange in 2003, its gold ETC has attracted a lot buying interest in recent weeks.
In fact, the ETFS Physical Gold ETC (PHAU: LN) has seen a stunning 240% increase in assets in just the past seven weeks. Total assets under management in all of the firm’s precious metal ETCs has surged to more than $500 million, out of a grand total of $1.5 billion in assets spread over 42 different ETCs, which track a wide range of commodities in addition to precious metals.
Diversifying with Non-Correlated Commodity Funds
Much of the buying interest seems to be coming from “investors seeking to diversify their portfolios away from equities and bonds,” according to ETFS, and for good reason. Research studies show that commodities have historically had a low to negative correlation with stocks and bonds. So they provide important risk-reduction benefits, especially in times of stock market stress – like the present environment.
Combine that with the ease of trading ETFs, right from a standard stock brokerage account, and their cost-effectiveness, and it’s no wonder investors are flocking to them.
ETFS sees growing investor demand for more exchange-traded commodity funds, and is set to launch some new and innovative products to meet that demand. Recently, the firm launched a series of ETCs that invest in forward futures contracts on crude oil; going out one, two, or even three years. And this week ETFS is launching more forward futures ETCs that will follow 29 different individual commodities and baskets of commodities – tracking everything from Aluminum to Zinc.
Double Your Pleasure with Leveraged Commodity ETFs
Not to be outdone, a U.S. based fund provider has come up with an innovative commodity-backed ETF strategy of its own… just add leverage!
PowerShares is planning to launch three commodity futures ETFs that are targeting double the return of the underlying index. The world’s first leveraged commodity ETFs will track existing gold and silver funds already offered by the firm, plus a precious metals basket leveraged ETF that includes a mix of both gold and silver. So the next time gold makes a 5% daily move – you can leverage up for potential gains of 10% in these new ETFs. What will they think of next!
I’m holding out hope for the world’s first ETF that tracks sub-prime mortgage loans… so I can sell it short!
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