Gold ETF Forecast for the Springtime of the 21st Century

Cycles of Boom and Bust for the Commodity and Top Exchange Traded Funds

A Market Brief
by

Steven Kim

MintKit Investing
www.mintkit.com

Disclaimer This brief is provided as a resource for information and education. The contents reflect personal views and should not be construed as recommendations to any investor in particular. Each investor has to conduct due diligence and design an agenda tailored to individual circumstances.
2012 MintKit.com

Executive Summary
A forecast of the top exchange traded fund (ETF) for the gold market sets the stage for an orderly approach to investing in precious metals. In drumming up an agenda, the main vehicles for investment fall into two broad classes: the commodity itself versus the producers within the mining industry. Naturally, each mode of transport comes with its own combo of strengths and drawbacks. In order to sketch out the prospects downstream, the deft investor looks first in the opposite direction. On one hand, the conditions of the past will never be fully duplicated in the future. Even so, the crucial features of the market are sure to crop up again and again as time goes by. As in other parts of the economy at large, a watershed in the gold market popped up with the financial crisis of 2008 along with the Great Recession. The severe conditions of the debacle, followed by the fitful recovery of the markets in its aftermath, laid bare the raw fibers of the financial forum and the real economy. Looking to the future, the demand for gold is slated to burgeon until at least the second half of the 21st century. The lusty trend is the prime mover behind the yellow metal over the long haul. On the other hand, the market is sure to be battered along the way by an endless hail of upthrows and downcasts. From a larger stance, the buildup of the global economy fuels a groundswell of demand for gold. The uplift is of course a godsend for the producers of the commodity. If prices are rising, then profits should increase for the industry as a whole over the short term as well as the medium range. Over the long run, however, the inrush of newcomers in a budding field along with the rigors of competition can lead to the squelch of earnings for the entire cast both old and new. The cruddy outcome is an example of the distinction between the fortunes of the commodity and its producers.

These and other factors play a vital role in sizing up the prospects for the gold market. As a first step in sorting out the muddle, a primal task is to examine the behavior of the marketplace during the tumultuous period that straddled the financial crisis and its aftermath. A second thrust lies in the difference between the movements of the raw commodity versus the antics of the mining stocks. A third function is to map out the key features of the gold market over the years and decades to come. Since the turn of the millennium, the golden metal has enjoyed a prolonged upswell in spite of the occasional setback. A case in point was the ascent that started in early 2010 and lasted until it faltered in the latter part of the following year. For the bulk of investors, the main vehicle for tracking the commodity lies in an exchange traded fund sporting the ticker symbol of GLD. Looking downrange, the next milestone for the index fund stands at its previous peak of some $185 per ounce. As things stand, the latter landmark will be reached in 2013. This objective lies $35 above the current support at the $150 level. In fractional terms, the increase amounts to a gain of some 23% in short order. After regaining its previous summit, GLD will take a breather before pushing ahead once more. On current trends, the vehicle should reach a sizable barrier at the $185 mark by the following winter. Shortly afterward, the commodity itself will touch a price of $2,000 per ounce in the commercial market. The big round number will then kindle a gale of excitement from the mass media and the investing public. To add to the bluster, a ragtag conga of talking heads will sashay out of the woodwork. The self-proclaimed swamis will declare that the prospects for the metal are not only bounteous but simply boundless. The outburst of hype will drive the metal higher in the futures market that serves as the touchstone for commercial transactions in gold bullion. In that case, the tracking fund in the stock market will of course follow suit. In the dash to the upside, the next hurdle for the ETF is a price level of $195 per share.

After hitting that target, the stock will fall back toward the $185 zone. Shortly afterward, the ETF should regain its vigor and zoom past $195 within a matter of months. The next milepost is a hefty barrier at the $220 level. The latter objective lies another $35 past the first milestone at $185. In relative terms, the advance comes out to a hike of a tad under 19%. After reaching that outpost, GLD will stagger back toward the previous hurdle at $195. Before long, though, the rig will muster enough energy to push ahead once more. All that will take us through 2014 and into the middle of this decade. By contrast to the raw commodity, the turnout for the mining firms depends more on the hoopla amongst the punters on the bourse than the outlook for either the yellow metal or the stock market at large. When GLD pushes past its prior peak, however, the investing public will once again chase after mining stocks. In due course, the value of the metal in the commercial market will break through the psychic barrier at $2,000 per ounce. The resulting spate of breathless reports from the mass media will then rouse the general public into a frenzy. Soon thereafter, the index funds for the mining firms will pare back their losses to date and shoot past their previous peaks. The surge of the mining stocks will draw in a deluge of cash from all quarters, including myriads of plungers who had never before heard about GLD, let alone the index funds for the mining firms. And so a bubble will duly form as the madding crowd rushes into the arena for a piece of the action. At this stage, however, the savvy players in the ring will begin a gradual process of withdrawal from the futures market for gold bullion as well the index funds for the mining firms. As the bonfire in the bazaar begins to sputter, a growing cohort of antsy players will wonder whether the uptrend in gold has run its course. And soon enough, the specter of a smashup will turn into a reality.

The ensuing crash of the market will of course deal a body blow to the mass of latecomers to the game. The first big punchout is likely to occur around 2015 or so. Even so, the fiasco will not mark the end of the boom in gold by a long shot. After wallowing in a funk for a couple of years, the commodity will be ready to stage a bigger comeback. As the market tramps upward and pushes past one milepost after another, millions of newcomers will jump on the bandwagon. In a fit of delirium, the gamesters in the ring will drive the metal to batty levels rivaled only by the lunacy of the Internet fever during the 1990s. Swept aloft by the uproar, the sizzling metal will not only reach fat round numbers like $5,000 per ounce but zip right past them. Theres a good chance that figures of this magnitude will spring up by the second half of the 2010s. Moreover the beefy prices will comprise mere waystations on a multistage journey to the $10,000 level. The latter target is likely to be reached around the 2020s. By contrast to the raw commodity, the index funds for the mining firms depend largely on the mood of the investing public rather than the action in the commercial market. In the throes of a feeding frenzy, the equities of the major producers could vault by tenfold or more within a matter of years. Meanwhile the index fund for junior miners is apt to explode in excess of a hundredfold beyond its initial peak. Such is the wild ride that awaits investors of all stripes in the arena. In these ways, the antics of the gold market in the decades ahead will eclipse the tidal waves of boom and bust in all previous eras. * * *

* * * Whatever the field of interest, the future is an outgrowth of current conditions in tandem with prior events. For this reason, a review of the past paves the way for a lucid glimpse of the future. On one hand, the conditions of the past will never be fully replicated on the morrow. Even so, some of the key features are sure to crop up repeatedly as time goes by. As in other parts of the economy at large, a watershed in the gold market cropped up with the financial crisis of 2008 along with the Great Recession. The severe conditions of the maelstrom, followed by the fitful recovery of the markets in its aftermath, revealed the raw fabric of the financial forum and the real economy. For heedful investors, the debacle served up a raft of pointers on the tenor of the markets under extreme conditions. From a larger stance, the course of a flighty asset depends on hard facts as well as soft traits. An example of the former involves a tally of corporate profits while an instance of the latter features the mindset of the investing public. Given the vagaries of a shifty environment as well as impulsive actors, the price level in a chaotic market never moves in a straight line. Even so, large-scale trends often show up in spite of the short-lived feints along the way. Since the turn of the millennium, the vigor of the gold market has shown up in the prolonged ascent of the index fund for the raw commodity. A case in point was the upswing that started in early 2010 and lasted until the latter part of the following year. Over the long range, the demand for gold is slated to burgeon throughout the world until at least the second half of the 21st century. The lusty trend is the prime mover behind the yellow metal over the long haul. On the other hand, the market is sure to be knocked about en route by an endless volley of upthrows and downcasts.

Looking at the big picture, the upswell of demand for gold nudges up the price of the metal over time. The upturn is of course a godsend for the producers of the commodity. If prices are rising, then profits should expand for the industry as a whole over the short term as well as the medium range. On the downside, though, a buildup of competition could in the long run result in the rubout of excess profits for all the firms toiling in the field. Another crucial factor involves the distinction between the metal and its producers over the short term. To bring up an example, the stocks of the mining firms may break down for no good reason even as the commodity climbs higher in the commercial market. These and other issues play a central role in sizing up the prospects for the gold market. As a first step toward sorting out the muddle, our task is to examine the behavior of the gold market during the tumultuous period that straddled the financial crisis and its aftermath. A second goal is to distinguish between the antics of the raw commodity versus the fortunes of the mining stocks. A third aim is to sketch out the outlook for the gold market over the years and decades to come.

Top Exchange Traded Funds for Gold

A communal pool based on a market index can provide a direct or indirect way to invest in the gold market. This section profiles the choice vehicles for investing in the commodity or its producers.

Index Fund for Gold Bullion A popular way to participate in the gold market lies in an index fund that holds a stockpile of bullion. To this end, the advantages of an exchange traded fund include the ease of purchase, efficiency of transactions, and cost-effectiveness in holding the asset. The hassles involved in owning physical gold can be bypassed by turning to an index fund. For this purpose, a communal pool listed on a stock exhange is a handy way to latch onto the ascent of gold in the modern era.

For this type of fund, the standard bearer lies in the SPDR Gold Trust Shares which is listed in the United States. The communal pool forms part of a larger suite of financial products known as the Standard & Poors Depositary Receipts (SPDR). The ticker symbol for the Gold Trust fund is GLD. As with any other ETF, the shares of the vehicle can be bought and sold through an equity account held at a brokerage house.

ETF of Large Miners An alternate way to ride the groundswell of gold lies in the equities of the companies in the mining industry. An example in this vein is a prospector or a producer of the precious metal. On the downside, though, the specter of a wipeout is a rampant threat in the mining industry. As a result, investing in a handful of outfits can be a hazardous affair. In that case, a safer tack is to trim the risk by taking up a broad swatch of companies. For this purpose, the obvious choice is an exchange traded fund based on an index of mining stocks. The purpose of the Gold Miners Index (GDM) is to keep abreast of the large producers of gold and silver. The benchmark includes dozens of public companies listed in America, ranging from Barrick and Goldcorp to Newmont and AngloGold. The Gold Miners Index serves as the backbone for an exchange traded fund called the Market Vectors Gold Miners. As the name suggests, the purpose of the pool is to track the price and yield of the equities covered by the GDM benchmark. The index fund is itself an equity listed on the New York Stock Exchange. The security trades under the call sign of GDX.

Exchange Traded Fund for Small Miners As a rule, a small company in any industry can grow at a faster clip than a larger rival. For this reason, many an investor has a fondness for bantam firms. To cater to this group of punters, one index of the mining industry deals with the midget players in the gold market. The name of the benchmark is as bulky as its members are compact: the Market Vectors Junior Gold Miners Index (MVGDXJ). The yardstick comprises dozens of companies that focus at least half of their efforts on gold and silver mining. The lineup covers small and midsize firms engaged in prospecting or extractive functions. The ticker symbol for the corresponding fund is GDXJ. Upon its inception in November 2009, around 63% of the value of the portfolio was taken up by companies based in Canada. Meanwhile the U.S. and Australia made up the bulk of the remainder. To round up the list, a couple of percent was claimed by South Africa, along with a share of roughly 1% for each of China and Britain. The equities of junior firms tend to be a lot more volatile than those of their larger brethren. On the bright side, the minikin stocks can soar to lofty heights on the wings of an updraft. By the same token, the small fry bite the dust in droves during the bust that always follows a boom in the mining industry. A lot of people think of an investment in the stock market as a rough ride on a roller coaster. Yet the analogy does not go far enough where the gold market is concerned. The turmoil on the bourse as a whole is a gentle wave compared to the manic swings within the mining patch. As a result, the field of mining in general is not for the faint of heart. Moreover the caution applies with special emphasis to the dicey niche populated by the junior firms.

ETF Comparison for the Gold Market

In mulling over the vehicles for the yellow metal, a basic step is to review the performance of the leading index funds. In line with the remarks in the previous section, the gold standard in the arena lies in the exchange traded fund for the raw commodity. Meanwhile the other duo of top contenders consist of the index funds for the small and middling firms focused on gold and other precious metals. For a rounded picture of performance, the period of review has to include an upsurge of the gold market as well as a smashup. To this end, a fitting timespan straddles the blowout of the market during the financial crisis of 2008 and the Great Recession, followed by a plodding recovery in the years to follow. From a different angle, an exchange traded fund of any stripe also happens to be an equity listed on the stock market. For this reason, a systematic analysis calls for a comparison of the ETF against the turnout of the bourse at large. Among the benchmarks of the equity market, the most popular yardstick used by professional investors lies in the Standard & Poors index of 500 leading stocks in the U.S. The yardstick is known by a variety of nicknames. A shorthand used by the financial media takes the form of the S&P 500. Meanwhile the traders in the trenches often refer to the benchmark more tersely as SPX. A notable exception is found in Yahoo Finance (finance.yahoo.com), which happens to be the most popular portal amongst the investing public. The Web site likes to refer to the flagship benchmark as ^GSPC. To return to the main topic, our preliminary task is to gauge the performance of the top exchange traded funds against each other as well as the SPX. For this purpose, the following chart has been adapted from a graphic provided by Yahoo Finance.

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The exhibit covers a period of 5 years ending in late 2012. In the chart, the course of the S&P 500 index is shown in purple. One notable feature lies in the staggered collapse of the benchmark in 2008 followed by a final dive the next spring. During the first half of 2008, the index fund for gold bullion struggled to hold onto its gains. Even so, GLD faltered in the autumn as the financial crisis began to unfold in earnest. A prime function of gold is to serve as a repository of wealth in troubled times. For this reason, the cheerleaders for the gold market had expected prior to the bombshell that the metal would show its mettle in the throes of a calamity. As things turned out, though, the icon of wealth tripped up in the early stages of the financial flap. The takedown sprang from a factor which the mavens in the marketplace had failed to consider in advance. When the financial crisis popped up and the stock market blew up, the investing public fled en masse from the scene of the carnage. In addition to basic assets such as stocks, the madding crowd dumped their stakes in all manner of equity funds. To redeem the shares turned in by the turncoats, the managers of the communal pools were forced to sell off a slew of assets. Yet the professional stewards were loath to pay off their clients by selling off the entirety of their equity holdings in the midst of a fire sale.
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For this reason, a lot of stewards who owned golden assets such as the operators of hedge funds opted to unload part of their stakes in the yellow metal in order to raise cash and meet their obligations to clients in the equity market. Due to the flood of sales, the bottom dropped out of the gold market as well. On the upside, though, the yellow metal managed to retain much of its value after the initial flight of the deserters from the marketplace. While the SPX was plumbing its lows in spring 2009, the commodity for the most part managed to clamber higher. Following the turnaround, the upward trek has largely continued in spite of the inevitable flurry of sideswipes and backtracks that beset a market of any sort. To return to the foregoing chart, the green line depicts the path of the index fund for the major vendors in the mining industry. A prominent feature of the display concerns the severe smashup of GDX during the financial flap of 2008. On the upside, though, the index fund recouped the bulk of its losses in short order. The following spring, the stock market as a whole fell apart in the depths of the Great Recession. Despite the mayhem on the bourse at large, GDX paid scant attention to the bedlam and opted instead to claw back its losses from the previous year. In late 2009, the yellow metal lost its footing and slipped up at the onset of winter. As a result, the index fund of giant miners followed suit. As spring approached, however, both the commodity and its producers trudged higher in spite of some pullbacks along the way. In the autumn of 2011, the stock market suffered another crash. The fiasco also knocked the gold market for a loop. In the aftershock, both the metal and its miners lost their mojo. The knockdown in the marketplace lasted until the autumn of 2012. After the whomping, the trio of index funds started to shrug off the doldrums and make a valiant effort to press on once more.

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Divergence of the Commodity and Its Miners

One remarkable feature of the chart above lies in the odd behavior of GDX between the autumn of 2011 and the summer of the following year. Over this timespan, the stock market gained traction while gold bullion thrashed around without going anywhere fast. In a mixed environment of this sort, one might expect the equity fund to turn in a performance that straddled the middle ground between the ascent of the bourse and the churn of the commodity. As things turned out, though, GDX followed its own piper and staggered toward lower ground. A major factor behind the comedown lay in a fresh round of jitters amongst international investors over the debt crisis in Europe along with concerns of a slowdown in China and other countries. Even so, the stock market at large as showcased by the S&P 500 index managed to tramp higher over the same stretch. On one hand, the SPX is a benchmark of companies listed on the U.S. bourse. On the other hand, the cohort of titans earn a growing share of their profits from overseas markets ranging from China and India to Turkey and Brazil. For this reason, an upturn in the flagship index is a vote of confidence by the investing public on the outlook for the global economy. If the markets of the world are trudging ahead, then the demand for natural resources should remain robust. In that case, the index fund for mining stocks ought to be advancing rather than retreating. From a different angle, an alternate reason for the takedown of the large miners surely lay in the cruddy performance of the lightweights within the industry. In the foregoing chart, the red squiggle shows the path taken by GDXJ since its rollout in the stock market in November 2009. The trace for the minor miners starts out from the same spot as the blue arc for GLD at that juncture. As a result, any divergence between the two curves depicts a gap in performance between the pair of index funds.
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During the first half-year of its launch, GDXJ rose and fell more or less in tandem with the fortunes of gold bullion. Then the junior miners pulled ahead and zoomed higher until the end of 2010. After hitting a peak, GDXJ bounced around for half a year. In the autumn of 2011, the bantam firms lost their footing and tumbled lower for nearly a year. Then the juniors staged a partial comeback during the following autumn. No doubt the travails of the flyweights had a negative impact on their bigger brethren. The churn of GDX throughout 2011 took a middle road between the downcast of the bantam firms versus the upturn of gold bullion as well as the stock market at large. As we noted earlier, GLD reached a zenith in autumn 2011 then fell back thereafter. Since the index fund holds a stockpile of bullion, the value of the equity is closely tied to the price of gold in the commercial market. For this reason, the index fund differs from the vast majority of exchange traded funds in its ability to brush aside the goings-on in the rest of the bourse. In particular, the ETF depends largely on the price of the metal in the commercial market based on futures contracts rather than the mood of the investing public in the stock market. On the other hand, GLD is in fact a security traded on a stock exchange. The cutdown of interest by investors in the equity market shows up in the volume of transactions as portrayed in the lower pane of the previous chart. For our purpose here, the absolute level of turnover at any stage happens to be immaterial. Instead, the relative change in transactions over time plays the dominant role. The pulse of trading in GLD shares spiked in autumn 2011 as the price of bullion reached an apex. After that point, the index fund lost its vim and paused for breath.

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As the commodity sagged in the commercial market, the thundering herd in the stock market lost their appetite for GLD. The shrinkage of interest is spotlighted by the orange slope slanting downward near the southeast corner of the chart above. If the index fund behaved like the bulk of securities listed on the bourse, the cutdown of interest would have landed a crushing blow on GLD. As we noted earlier, though, the tracking fund responds mostly to the action in the commercial market rather than the stock market. On the other hand, the equities of the mining firms are fully exposed to the whimsy of the punters in the stock market. For this reason, both GDX and GDXJ suffered heavy losses as the thundering herd turned away from the gold market. On the bright side, though, a silver lining glimmers on the horizon for the woeful investor in the mining patch. To wit, the shrinkage of interest in the golden asset cant continue much longer. Before long, the volume of transactions in GLD is bound to hit rock bottom. At that point, the stage will be set for a strapping comeback of the yellow metal. The return of the investing crowd to the gold market will uplift the index funds for the mining firms as well as the commodity itself.

Gold ETF Forecast

While the future depends on the past, the linkage does not apply in equal measure to all time frames. As an example, the current environment is likely to have a greater impact on the movement of the market over the near future compared to the long range. Looking in the opposite direction, the run of recent history should play a larger role than the course of the distant past in affecting the turn of events going forward. Simply put, the value of the lessons from the past tends to dwindle as the window of appraisal lies further away from the present. The story is similar for the credibility of any projections in the forward direction.

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Given this backdrop, the thoughtful investor has to trade off the big picture of an expansive view versus the greater relevance of a compact window focused on the recent past. As an example, the decision maker has to balance the wealth of information contained in a long history of price data against the punch of a short record covering only recent events. For our needs here, a suitable compromise between the opposing factors lies in a span of several years that includes an upsurge as well as a smackdown of the gold market. In this light, a helpful aid is found in a graphic display of weekly data for GLD over the course of 3 years ending in late 2012. For this purpose, the exhibit below has been adapted from StockCharts (stockcharts.com), a standard resource for serious investors of a technical bent.

Given its target audience of savvy users, the Web site provides a plethora of tools for carrying out diverse forms of technical analysis. Despite the wealth of techniques on offer, though, we will require nothing in the way of fancy tricks. Instead, a simple scheme based on visual cues will meet our needs. In fact, a lean and plain approach should turn out to be at least as informative for the long-range investor as a convoluted probe based on a heap of arcane techniques.

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The backbone of the chart above lies in a series of stick figures, each of which is known as a bar. An icon of this kind depicts the extreme values of the price level over a particular timespan. In our case, each slot of time spans a single week. Over this stretch, the critical points take the form of the Open, High, Low and Close (OHLC) values of the price record for the interval. On a given bar, the top and bottom ends of the vertical stroke correpond to the maximum (High) and minimum (Low) values of the price range during the week. Meanwhile, a stub on the left side of the stake depicts the value at the beginning (Open) of the period. In a similar way, a tick to the right side denotes the price at the end (Close) of the week. If the terminal value for the week happens to be lower than the initial level, the entire bar is colored in red. Otherwise the icon is rendered in black. The bottom portion of the exhibit shows the volume of transactions for the bullion fund. We will not make much use of this information other than to confirm a trading pattern we saw earlier on the first chart above. To be precise, the shrinking volume of transactions in the right half of the display reflects the cutdown of interest by the actors in the stock market. In particular, the turnover in GLD spiked as the price level hit a peak in the summer of 2011. Then the tempo of trading dwindled over time as portrayed in the bottom right portion of the chart. As we noted earlier, the flight of the fair-weather friends from the marketplace happens to be a bullish sign for the golden metal and its index fund. A prominent feature of the chart lies in the prolonged rise of GLD from early 2010 to the latter part of the following year. The ascent is highlighted by the upward ramp painted in lime green. After touching a peak in the early autumn of 2011, the index fund crumpled in stages until the following summer. The takedown is outlined by the purple stroke slanting downward.

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On a cheery note, however, GLD managed to check its slide in the vicinity of $150 per share. The support of the traders and investors for the stock at this checkpoint is portrayed in brown. The pullback in GLD was of course an outgrowth of the tizzy in the stock market coupled with the crash of the bourse in the autumn of 2011. By the middle of the following year, though, the golden fund had recovered its vigor. From this point onward, the next milestone for the ETF lies at the previous summit at the $185 level. As things stand, that objective should be attained as 2013 wears on. The watershed at $185 hovers $35 above the current support at $150. In fractional terms, the increase amounts to a gain of some 23% within a year or so. After regaining its prior peak, GLD will pause for a breather. In that case, the most likely move is a pullback to the $175 zone as shown by the blue plank. The chain of minor peaks at that height, which used to act as a resistance for the vehicle in the past, will now serve as a line of support. Whatever the resting point, the index fund will gather its strength before long and press on once more. On the current heading, the stock should breach the hulking barrier at the $185 level by the following winter. Shortly thereafter, the value of gold bullion in the commercial market will touch a price of $2,000 per ounce. At that stage, the mass media and the investing public will have a field day over the big round number. To add to the bluster, a long parade of talking heads will proclaim that the prospects for the metal are not only bounteous but boundless. The splash of publicity will draw in myriads of punters from all walks of life. Thanks to the onrush of newcomers, the volume of transactions in GLD will explode. As the yellow metal climbs higher in the futures market, so will the tracking fund in the stock market. During the upward trek, the next hurdle for the ETF is a price level of $195 per share.
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After hitting the roadblock, the stock will fall back toward the $185 level. On the bright side, though, the equity will not linger long at this juncture. Instead, the ETF should regain its vim and shoot past the $195 mark within a matter of months. The subsequent milepost is a hefty barrier at the $220 level. The latter target lies another $35 past the first milestone at $185. In relative terms, the advance comes out to a hike of almost 19%. After reaching that outpost, GLD will stagger back toward the previous hurdle at $195. The index fund should then loiter in this vicinity for months on end. In due course, though, the vehicle will muster enough energy to sally forth once more. All that will take us into 2014 and the middle of this decade. By contrast to gold bullion, the performance of the mining stocks depends more on the hullabaloo in the marketplace than the status of either the raw material or the stock market at large. Once GLD pushes past its prior peak, however, the index funds will regain their vitality. Before long, the value of the commodity in the commercial market will break through the psychic barrier at $2,000 per ounce. The resulting spate of breathless reports in the mass media will then rouse the investing public into a buying spree. As a result, both the major miners and junior vendors will snap back from their backtracks and zoom past their previous peaks. The heady climb of the mining stocks will draw in additional pools of money from all quarters, including myriads of plungers who had never before heard about GLD, let alone GDX or GDXJ. And so a bubble will duly form as the madding crowd rushes into the arena for a piece of the action. At this stage, however, the savvy players will begin a gradual process of withdrawal from the marketplace; namely, the futures market for the commodity as well the equity funds for its producers.

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As the froth in the bazaar begins to subside, a growing throng of gamesters will wonder whether the uptrend has run its course. And before long, the specter of a blowup will turn into a reality. The ensuing smashup will of course deal a body blow to the mass of latecomers to the game. The first big punchout is likely to occur around 2015 or so. But that will not be the end of the gold craze by a long shot. After wallowing in a funk for a couple of years, the gold market will be ready to stage a bigger comeback. The lull before the wildfire will pave the way for a raging rally on a fabulous scale. Along the way, the orgy of speculation by lonesome individuals as well as communal pools will be a sight to behold. And so will the blowout of epic proportions when the hysteria comes to poop out.

Long View of the Gold Market

As we peer further into the future, the chance of a big surprise grows ever greater with the passage of time. Moreover a bolt out of the blue could well derail the entire train of predictions. For this reason, it makes scant sense to map out a detailed picture of the twists and turns that are likely to lie along the path of least resistance. Instead, a wiser approach is to sketch out the crucial features of the landscape that are apt to arise regardless of the precise path taken by the course of events. Despite the veil of fog that obscures the horizon, one thing seems certain enough. The inexorable tramp of gold through a series of higher highs will seize the fancy of the financial community as well as the general public. As the market clambers upward and pushes past one milepost after another, a horde of newcomers by the millions will pounce on the bandwagon. In a fit of delirium, the plungers will drive the metal to ditsy heights rivaled only by the Internet craze during the 1990s.
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In the heat of the wildfire, the stocks of the gold miners will blast through the roof. Amid the dancing in the streets, any huckster with a glib tongue should be able to cash in on the madness. A shamster without zero experience in mining let alone the production of commodities nor any experience in business at all could set up a shell company and round up mounds of dough from a pack of wild-eyed investors. As a result, a slew of ill-begotten ventures will pop up like weeds in the spring. The shamsters behind the startups will declare their intent to run off into the wilderness in some remote patch of the planet and go out prospecting for precious metals. The tinny claim should suffice for a rustler to suck in tens of millions of dollars from a host of gullible investors. For anyone with a smidgen of actual exposure in the mining industry, the quandary will not be a lack of capital but a glut of it. The hapless souls will have to fight off a constant barrage of entreaties from all quarters ranging from friends of friends to strangers off the street to fire up brand-new ventures and accept huge piles of dough for investment. Swept aloft by the gust of excitement, the yellow metal will not only reach fat round numbers like $5,000 per ounce but soar right past them. Theres a good chance that outcrops of this magnitude will show up by the second half of the 2010s. Moreover the bulging prices will represent merely the waystations on a multistage trek to the $10,000 level. The latter target is likely to be reached around the 2020s. As we noted earlier, the value of GLD springs from a storehouse of gold bullion. On a negative note, the return on investment for the index fund trails slightly below the turnout for the metal itself. The gap in performance springs from the cost of operations ranging from the payroll for the custodians to the overhead for warehousing the commodity. On a positive note, however, the return on GLD shares does not diverge a great deal from the relative change in the value of gold bullion from one year to the next. For this reason, the payoff for the shareholder trails only slightly behind the outturn for the raw metal.

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By contrast, we saw earlier that the index funds for the mining firms can surge and swoon based largely on the sentiments of the investing public. Once a rally gets going in earnest, the commotion will draw in a vast swarm of latecomers into the field. The rabid horde will gobble up everything in sight that looks or smells remotely like a mining firm. Among the latter will be scads of shell companies which are churned out expressly for the purpose of bilking the ravenous mob. In the throes of the bacchanal, the eager beavers will bid up the stocks of the major miners to giddy heights. In that case, the value of GDX should vault by tenfold or more within a matter of years. The story is similar for the junior firms except more so. In the spasms of a stampede, the berserk crowd could easily catapult the shares of GDXJ by a factor of a hundred or more beyond its initial peak in 2010. In the grand scheme of things, there will come a time when gold is worth 10 grand per ounce by any sensible criterion. In fact, the red-letter day could well arrive within a couple of decades. On the other hand, the splashy landmark will first be reached by way of a short-lived bubble that builds up then goes poof way before its proper time. In these ways, the antics of the yellow metal in the decades ahead will eclipse the cycles of boom and bust in all previous eras. For the gamers who need a little pizzazz in their lives, such are the spectacles on offer as the age of gold wears on.

Upping the Odds of Success

The future of the gold market sketched out above is of course a likely scenario rather than an assured one. As a counterexample, the default train of events for GLD could be derailed by any number of godsends and upsets. A showcase involves a massive quake that smashes a busy port and disrupts the flow of international trade, thus sparking a worldwide recession and bashing the gold market to boot. Another sample involves a recognition by the general public that the true upsurge in
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the cost of living far outstrips the stunted rates of inflation cooked up by government agencies; the insight could then provoke a stampede into the gold market along with other precious metals. In this iffy setting, the prudent investor always keeps in mind the potential for sideswipes and upsets in a complex and shifty environment. In fact, the difficulty of forecasting a chaotic market prods a lot of folks into throwing up their hands and swearing away from auguries of any sort. On the other hand, the constant hail of upthrows in the marketplace provides a good reason for more planning rather than less. To bring up an old saw, if you dont know where youre going then any path will take you there. On the glum side, though, you might not like where you end up. But there is of course a trusty way to lift the odds of winding up in a favorable spot. In particular, a trenchant program of advance planning can go a long way toward bringing about the results desired.

Further Information
The action in the gold market is closely tied to the lot of natural resources in general. As an example, the market for raw materials goes through an endless chain of booms and busts whereby each cycle lasts around 34 years. The long wave of natural resources is merely one instance of a slew of patterns in the financial forum and the real economy. A survey of recurrent motifs in the marketplace is available at MintKit Core under the rubric of Market Cycles. A link to the write-up is given below. As we saw earlier, an exchange traded fund is the best type of vehicle for the bulk of investors. Within the gold market, the workhorses take the form of GLD, GDX and GDXJ.

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The trinity of index funds is presented in greater detail in an article titled, How to Invest in Gold ETFs. The primer delves into the nature of the communal pools along with their respective strengths and drawbacks.

References
MintKit Core. Market Cycles. http://www.mintkit.com/market-cycles. MintKit Core. How to Invest in Gold ETFs. http://www.mintkit.com/invest-gold-etfs.

* * * Keywords: Gold, Forecast, Exchange Traded Funds, ETF, Top, Market, Mining, Stock, Index, Commodities, Growth, GLD, GDX, GDXJ

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