ETF Trends
ETF Trends

The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), which tracks the price movement of the U.S. dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc, and the actively managed WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEArca: USDU), which tracks the USD against a broader basket of developed and emerging market currencies are both heading to May gains of more than 2%.

That should not be good news for gold exchange traded funds, but give the SPDR Gold Shares (NYSEArca: GLD) some credit. The largest ETF backed by physical bullion holdings is up nearly 1.5% this month, an impressive feat considering gold’s often inverse relationship to the dollar. Traders are taking note of GLD’s May strength.

On Thursday, GLD options volume was 3.5 times the daily average, aided by one trader buying 100,000 June $117.5 calls, reports Lawrence Lewitinn for CNBC.

Some market observers argue that the Federal Reserve could push off on tightening its monetary policies. Consequently, without a central bank stepping in, inflation could begin to pick up, increasing gold’s appeal as a better store of value, especially in a low interest rate environment. [Gold ETFs Shine]

A prolonged low-rate environment would support gold prices as a tighter monetary policy typically strengthens the U.S. dollar and keeps inflationary pressures in check.

Gold has also been strengthening after the U.S. dollar depreciated against a basket of foreign currencies – consumers and investors are able to acquire more USD-denominated gold for less if the dollar currency weakens. [Gold ETFs Look for More After Recent Rally]

“For what it is worth, GLD is trading below its 50 day MA currently after trading higher than $117 just nine trading sessions ago, as Gold prices have softened in the past week or so. Given the interest in upside call options, which of course is a leveraged long motivated trade, it also makes a ton of sense for us to closely monitor the levered long Gold ETPs that are periodically popular in the space,” said Street One Financial Vice President Paul Weisbruch in a note out Friday.

Those leveraged long gold ETFs include the PowerShares DB Gold Double Long ETN (NYSEArca: DGP) and the ProShares Ultra Gold (NYSEArca: UGL).

Trading in those ETFs “has been reasonably light during the recent pullback in Gold prices, but that could change in a blink especially if the GLD call buyers turn out to be directionally correct in the short term, and we would expect potentially heavier usage of such leveraged long products if that turns out to be the case,” notes Weisbruch.

SPDR Gold Shares

Tom Lydon’s clients own shares of GLD.