Let's start with a review:

There are different types of gold ETFs, such as: open-ended funds, closed-ended funds, and unit investment trusts. Some types have differing tax consequences.

Shares or units of a Gold ETF that are owned by investors are typically fully backed by gold bullion bars a custodian holds for the Fund. The securities trade on stock exchanges such as the ASX (Australia), TSX (Toronto), LSE (London) or the NYSE, on the basis of the current price of the underlying gold bullion.

There are also ETFs that invest in both gold and silver bullion.

According to Yahoo Finance, the streetTRACKS Gold Trust (NYSE: GLD) is an investment trust whose shares strive to reflect the performance of the price of gold bullion, less expenses of the Trust. The Trust holds gold, and is expected to issue baskets in exchange for deposits of gold, and to distribute gold in connection with redemptions of baskets. The gold held by the trust will only be sold on an as-needed basis to pay trust expenses, in the event the Trust terminates and liquidates its assets, or as otherwise required by law or regulation. The Trust is not managed like an active investment vehicle, and it's not registered as an investment company under the Investment Company Act of 1940.

In addition to the new streetTRACKS Gold Trust (NYSE: GLD), there are three well-known bullion ETF's:

· Gold Bullion Securities (LSE: GBS) is an open-end gold fund that has traded on the London Stock Exchange since March 31, 2004,

· Gold Bullion Securities (ASX: GOLD) is the same GBS open-end gold fund that trades on the Australian Stock Exchange, and

· Central Fund of Canada (TSX: CEF.NV.A) (AMEX: CEF) is a Gold and Silver Bullion Share Investment (At least 90% of Central's assets are Gold and Silver at all times.) that invests in combined gold and silver bullion holdings at a ratio of 1:50 by weight, which is about 50/50 by USD value. The Central Fund trades is the oldest bullion ETF, having been founded in 1961, but has evolved a lot over the years.

For most investors there are distinct advantages to owning a Gold ETF rather than the bullion directly. Gold ETF shares or units:
· Allow investors to invest without the cost of physical bullion storage, insurance and certification, or the "management risk" associated with gold mining companies.
· Trade on stock exchanges, ensuring liquidity and also making gold available for "portfolio insurance".
· Have zero credit risk and minimal counter party risk.
· Have, for the open-end funds, a very low tracking error on the price of gold.

The new Gold ETFs are believed by many to increase the demand for gold by making gold available to institutional investors, which heretofore had been restricted in investing in non-registered securities. In fact, during its first week of trading on the LSE, Gold Bullion Securities (LSE: GBS) took up ~20 tons of gold and the streetTRACKS Gold Trust (NYSE: GLD) took up ~50 tons of gold (by my estimates), which obviously increased the gold price in the near term.

In the long run, however, the demand for gold bullion-related securities will be based on factors other than the purchase of bullion that backs the value of paper securities, unless there is increasing demand for those securities. That degree of investor demand will relate to the traditional gold pricing model.

Today, analysts are telling you that there is a direct inverse relationship between the U.S. Dollar and Gold, but it is not that simple. There are a multitude of factors related to the trends and cycles of each of these price series.

It is true that, in the past 2 and ½ years, Gold has traded in an inverse (or counter-)cyclical relationship to the USD. The same pressures pushing down on the USD have been pushing up on the gold price.

Also, in the past 2 and ½ years, the trend of the U.S. Dollar has been down and the trend of Gold bullion has been up, which is an inverse trend relationship. But, in the case of trend, the inverse relationship has not been 1 to 1.

For instance, since August 2002, the price of gold bullion rose 50 percent from US$300 to US$450, while the trade-weighted U.S. Dollar index declined 32 percent from 108 to 82, which is not a 1:1 relationship.

The price of gold bullion could continue to trade higher in both its trend and its cycle or it might not. In fact, it could trade higher in its trend, and lower in its cycle (relative to the USD say) until the gold price trend reverses to a down trend.

For this reason, investors have to be cautious when they listen to analysts rattle off a six-second sound bite for Financial Entertainment Television. You have to do the analysis yourself.

Think about what the metal is.

Unlike an industrial metal, Gold is a measure of wealth (i.e., the storehouse of value concept), but it does not create wealth. This is an important point.

Wealth is created by investing cash directly, or indirectly via portfolio investment, in productive processes that are applied to labor, materials and land. Investing in a gold mine could create wealth, but not in gold itself. Gold, like a stock, is just a price.

To create wealth with gold, you have to fabricate the metal into jewellery. In its bullion form, it is not wealth creating.

And, when wealth is created we expect a return on the capital we invested to create this new wealth, which is returned to us in the form of trading gains (from rising price trends), dividends and/or interest (all of which is cash), as well as the unrealized gains inherent in the higher market price of the securities.

Because gold represents a form of unallocated cash, to be held when investors believe it should not be allocated (or invested) to real wealth building processes, there is a direct inverse relationship between the gold price trend and wealth creation.

Presently, much wealth is being destroyed, for example, as the U.S. government is fighting its war on terrorism. War is the time in history, for several centuries that capital markets trading has been studied, that gold rises in price relatively faster than paper securities, including money.

In post-war periods, money is typically allocated to wealth production, and that is the time that the price of paper securities, including money, rises faster than gold.

Remember gold sits in a vault and is timeless, whereas time is money. People who hold it typically want to put it to work, to create wealth by investing it.

And when they see real wealth creating opportunities they will invest all their money (leaving none unallocated, which brings down the relative price of gold) and in the absence of their own money relative to the wealth creating opportunities, people will borrow money, which increases its cost.

During this phase of rapid wealth creation, the U.S. Dollar is usually in a strong up trend.

But there is a law of diminishing returns, and at some point in the cycle, money starts being allocated to projects that are not creating assets (wealth) as fast as debts (paper and paper money) are being incurred. That's when the gold price cycle strengthens.

Like today.

Yes, there are also the gold-related cyclical relationships to consider. One of them is the impact of real interest rates on the gold price.

The ‘real' interest rate is defined as the difference between the actual cost of money (i.e., the interest rate) and the consumer price inflation (CPI) index. The CPI index is a year-over-year calculation.

To calculate the one-year cost of money, I simply use the mean average of the 3-Month and 2-Year U.S. Treasury bill yields, which I get from the Yahoo Finance web site (but there are many of these like Bloomberg, for instance, or the 1-Year CD rate from BankRate.com).

To get CPI data in tabular form from the U.S. Department of Labor, Bureau of Labor Statistics, go to the government web site.

Where you find that CPI is rising faster than the cost of money, the real interest rate is falling, and that is a factor that will push up on the gold price.

There will be times where the actual interest rate rises, causing the USD to rise because of rising foreign demand for U.S. securities (like the 10-Year U.S. Treasury Bond), but where real interest rates are falling because the CPI is jumping faster than actual interest rates.

In that case, I may expect to see the U.S. Dollar actually reverse its down trend, but I would also expect to see the cyclical price of gold to rise faster than the USD.

I created a graphic to try to illustrate the simplest concept for my gold trading, using GLD (NYSE) for gold (although it could also be GOLD on COMEX) and USD (NYMEX) for the U.S. Dollar:

For GLD (follow the up trend line):
Between cycle points #1 and #2, I would be closing GLD short positions.

Between cycle points #2 and #3, I would be opening GLD long positions.

Between cycle points #5 and #6, I would be selling GLD long positions.

Between cycle points #6 and #7, I would be opening GLD short positions.

For USD (follow the down trend line):
Between cycle points #1 and #2, I would be selling USD long positions.

Between cycle points #2 and #3, I would be opening USD short positions.

Between cycle points #5 and #6, I would be closing USD short positions.

Between cycle points #6 and #7, I would be opening USD long positions.

These are idealized models, however, the study and application of trend and cycle data, in combination with fundamental, quantitative and macro-economic data, will help you make good investment and trading decisions.

In this brief article, I have discussed only the application of trend and cycle plus macro-economic data. I did not venture into corporate fundamental or quantitative data.

Traders try to identify the general point of cycle for each data series, regardless of what they are trading. They know there are always factors that occasionally push the data series into higher amplitudes than expected, or pull it to lower amplitudes than expected. Mostly these factors are hidden knowledge and collaborative actions by insiders, which is why I constantly rail about the need for timely "full, true and plain" disclosure.

It's also why I say that today's news is usually just news to the rest of us. We have to wait a few days, weeks or months to see who was creating it at the time we were told it was "news".

I've used some basic algebra here to show the science of trading, but in fact, it is more of an art. It's like a dance. When you get good at it, you tend to make better moves, and step on fewer toes, but almost never does it work out in textbook fashion.

That's why human and machine must work together to meet one's goals. If the capital markets were pure science, it really wouldn't be that much fun.

Investing and trading is much about trend and cycles. Investors stay on the right side of trend, with knowledge of cycles, while traders trade the cycles, with knowledge of the trend.

For now the trend of gold is up and the trend of the USD is down. There has been recent corrective cycles followed by a reversion to the mean of the trend data.

Depending on what levels U.S. interest rates go to in this time frame, the U.S. Dollar may continue its down trend or it could reverse trend. That's still to be seen, which makes the point I am writing about: nobody knows until the policies of the Fed are implemented, and at this point in time we don't even know who will be the next Fed chairman, or whether other nations will begin to support the war against terrorism in order to save their currencies, relative to the USD, and in doing so start to build a healthier and wealthier economy in their home lands.

That's a different situation to gold.

I just know that as long as there is an abundance of unallocated cash in the world, and death and destruction is the order of the day in the Middle East, that GLD is going higher.

As for making a forecast of future prices for the GLD, I'd have to say based on the strength I observe in the trend and cycles data that GLD will trade in the mid 60's within two years, possibly in the US$625 to US$675 range at a cycle top.

Have a good day.

This article will also be placed on Tom Ott's Sixth World. I encourage free-thinking readers to go there to find an abundance of riches, this week on GLD.

BCara@BillCara.com