Gold exchange traded products, such as the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL) are encountering plenty of headwinds to end 2016. However, that could be creating an opportunity for bullion-backed ETFs to rebound.
Over the past month, the big-name gold ETFs have incurred double-digit losses and gold’s weakness over that span is prompting some analysts to lower their 2017 forecasts on the yellow metal. GLD and rival gold ETFs recently dealt with the Federal Reserve’s first interest rate hike of 2016 and now face the specter of up to three more rate increases next year.
Investors widely expected gold to rally if Republican Donald Trump won the presidential election earlier this month, which he did, but that thesis proved incorrect. Democratic challenger Hillary Clinton may have actually been the preferred victor for gold ETFs because historical data suggest gold performs better when Democrats are in the White House.
“U.S. debt dynamics are expected to turn positive for gold in 2017. That’s according to ICBC Standard Bank, which makes the case that the costs of higher yields are being overlooked. The Congressional Budget Office (CBO) calculates that net interest payments on the nearly $14 trillion of U.S. debt will amount to about $250 billion in 2016—or 1.4 percent of U.S. gross domestic product,” according to ETF Daily News.
Gold has enjoyed greater demand in a low interest-rate environment as the hard asset becomes more attractive to investors compared to yield-bearing assets. However, traders lose interest in gold when rates rise since the bullion does not produce a yield.
The Federal Reserve is targeting three interest rate hikes next year, but other global central banks remain accomodative.
Looking ahead, the ongoing negative interest rate environment, with European and Japanese central banks cutting benchmark rates deeper into the red to promote growth, could push investors toward gold bullion as a more stable store of wealth.
Reduced supply could also boost gold ETFs next year.
“Regardless of when peak gold might occur, it’s pretty widely accepted that all of the low hanging fruit, with regard to major deposits, has already been picked. As a consequence, we’ll likely see an increase in gold recycling, but the metal’s price could also rise as supply becomes restricted,” according to ETF Daily News.
For more information on the gold market, visit our gold category.
Tom Lydon’s clients own shares of GLD.