Gold prices have succumbed to the overall effects of an ailing economy and investors seem to follow the trend of shorting gold and related exchange traded funds (ETFs).
On Friday, gold futures closed slightly higher on flight-to-safety buying, reversing an eight-day losing streak, reports Allen Sykora for The Wall Street Journal. That wasn’t the case earlier this week, though, as even when the market sank, gold followed suit.
One expert said that this time, gold is being driven higher by two things: equities weakness and physical demand.
But is this one-day rally going to last?
On the “No” Side…It is thought that the drop in gold is a function of how weakly other markets are performing and a deleveraging effect has been attributed to anything related to the financial markets. Gold is also traditionally a commodity used in Jewelry or in electronics. Both sectors have been doing poorly under diminished demand.
On the “Yes” Side…But the weakness in jewelry and industrial demand is also starting to be offset by increases in investment demand like bar hoarding and official coins, writes Keith Lerner for IndexUniverse. Furthermore, ETFs have also driven up investment demand because of the ease with which individuals may invest in the commodity. If investment rates in ETFs continue, ETF purchases for this year could surpass the 2,120 tons acquired for jewelry in 2008, which would make ETFs the top source for demand.
Wherever you land, there’s an ETF to represent your sentiment. But watch those trend lines:
- SPDR Gold Shares (GLD): up 6.3% year-to-date
- PowerShares DB Gold Double Short ETN (DZZ): down 12.6% year-to-date
Gold Miners. Another way to invest in gold is through gold miners. Golding mining shares and the price of gold are inseparably linked. As production costs from steel and energy go further down, gold mining operations are seeing better margins on top of an increased price in gold, reports Dominic Lau for Reuters UK. Further lowered costs can also be attributed to the depreciating currencies in regions in which gold producers are operating.
But take note that gold mining shares tend to be more volatile than that of their bullion counterpart. It is calculated that on average for every 1% fall in gold prices, gold miners’ shares could drop 3%.
- Market Vectors Gold Miners ETF (GDX): down 2.5% year-to-date
U.S. copper futures are near three-month highs after a report on non-farm payrolls failed to deliver any surprises, leaving prices elevated, reports Reuters. Market momentum may extend to $1.75, and one broker says the level of $1.70 appears to be a base of resistance.
- PowerShares DB Base Metals (DBB): up 2.7% in the last week; down 0.4% in the last month; down 11.9% in the last three months; copper futures are 32.7% of the fund
For full disclosure, some of Tom Lydon’s clients own shares of GLD.