By Steve B Wise
Many investors turned to gold ETFs in 2011 as a means of diversifying their asset allocation. Fear about the state of the global economy and general socio-political upheaval in Europe and the Middle East drove investors both to the sidelines and into precious metals and other commodities in record numbers. A brief recap of the events of 2011 follows with an eye toward what events are likely to shape 2012.

Federal Reserve Quantitative Easing Set the Stage for Gold ETFs Rise

It is hardly coincidence that the price of gold ETFs rose sharply in the first half of the year. The Federal Reserve was in the latter stages of its most ambitious asset purchasing program in its history via a second round of Quantitative Easing. This program pushed large amounts of cash into the market in exchange for various assets (mostly short dated treasury bills and bonds). The result of this program in the eyes of many investors was dilution of the purchasing power of the US dollar. When investors fear dollar devaluation (inflation) these days they buy gold ETFs - given their greater availability and liquidity. It isn't much of a surprise then that when quantitative easing ended at the beginning of July that commodity prices across the board reached a peak.

Japanese Quake and Tsunami Caused Significant Supply Chain Disruptions

Adding to the fears of investors around the world was the devastating quake and tsunami in Japan. The magnitude 9.0 quake unleashed a tsunami on the eastern coast of Japan near Sendai which flattened many coastal towns and ruined multiple nuclear power reactors. The destruction of the Dai Ichi power plant caused substantial power shortages in cities as far away as Tokyo and is today still presenting a life and health hazard from the radiation which escaped from the plant. Oddly enough the supply chain disruption in the automobile industry may have in some ways been beneficial as a means of keeping prices artificially elevated during the balance of 2011.

Arab Spring and Rioting in Eurozone Roiled Markets

The other major paradigm in the last year was the spread of social upheaval in the Middle East and debt-laden Eurozone countries. Riots in Greece and Spain were common, and protests turned violent in the United Kingdom as well. Major political shifts were also the result of rioting and protests in Egypt, Tunisia, and Libya - the latter of which resulted in a relatively short civil war and the light crude oil supply disruption. Markets around the world had difficulty absorbing the news and pricing it into assets. Supply disruptions stoked fears of a global slowdown and the result was a rise in the US dollar and the begin of a decline in gold ETFs pricing.

Speculating on Events to Come in 2012

Little has changed in the world as we turn the calendar from 2011 to 2012. What events can investors expect to shape markets in the coming year? Most pundits are focused on the upcoming debt auctions for Italy and Spain - whose major re-financing in 2012 are the biggest hyped events entering the new year. If debt financing goes relatively smoothly it would mean fears of loose monetary policy in the Eurozone would likely increase demand for gold ETFs once again in 2012.

The best gold ETF returned better than 9% in 2011 - and at one point returns were better than 25%. 2012 may provide different results for the precious metal - and as a result short gold ETFs may ultimately become in greater demand.
courtesy : EzineArticles.com