Gold ETF (GLD) Is Hot, But Does It Mean The End For Gold's Bull Run?

In my opinion, the launch of a new sector based ETF is probably one of the best contrarian indicators out there. Now, I'm not talking about the sector making a short term top, but rather an extreme high that stands for years to come.

This is not the fault of ETF's but simply the fact that those who launch a new ETF are doing so in response to investor demand. The same is true with the launch of sector mutual funds, futures or option products. They want to make sure they launch new products that create lots of volume and excitement. The most exciting ETF launch of this year has been in gold. Is it a coincidence that GLD debuted at the same time gold was hitting 16 year highs? I don't think so.



Just look at the trading volume of the Gold ( GLD ) ETF in the first 14 days of trading, volume has been between 4,000,000 and 10,000,000 shares every day which is extraordinary for any new investment vehicle. Granted, the new Gold ETF is probably the most efficient way to own the commodity so that accounts for part of it's instant appeal. But it also indicates that the interest in gold investing is also very high. This type of wildly bullish sentiment is often present at major market tops.

When other sectors ETF's have launched such as the BHH ( Business to Business Holders ), IYW ( Dow Jones Tech Index ), IYV ( DJ Internet Sector ) and IYZ ( DJ US Telecom ) all launched within weeks of major tops in each sector. Ironically, IYV launched at the top of the internet bubble and was closed right near the lows of all the major internet companies such as AMZN, EBAY, YHOO and others. All IYV holders (including me) were forced to cash in our shares at the bottom of a grueling sector bear market. The reason I had bought the ETF was to avoid having to pick which individual stocks were going to survive.

The only example I know of where an ETF was launched at the bottom of a sector cycle (I'm sure there are others) was in the energy services ( XLE ). If you would've bought it the day it opened, you would've entered near a major cycle low for oil stocks. Needless to say, XLE didn't have an average trading volume of 7.5 million per day when it launched. There is always much more enthusiasm at a major top!

Who knows how this will all play out, but it's definitely just another indicator to keep on the long term radar. If a sector is red hot and a new ETF comes to market based on that sector, you may want to think twice about plunking down that hard earned cash!