Gold and bullion-related exchange traded funds are experiencing their best rally since January as the depreciating U.S. dollar helped support the gains.
Over the past week, SPDR Gold Shares (NYSEArca: GLD) rose 3.1%, iShares Gold Trust (NYSEArca: IAU) added 3.0% and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL) returned 3.0%. After the recent surge, the gold ETFs are now trading back above their 200-day simple moving average. [Gold ETFs Look for More After Recent Rally]
COMEX gold futures were up 0.2% Monday, hovering around $1,227 per ounce.
Gold prices are strengthening on the depreciating U.S. dollar as the weaker U.S. consumer confidence and factory production weighed on the greenback over the past five weeks, reports Marvin G Perez for Bloomberg.
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, has declined 5.3% over the past month. However, the USD was strengthening against foreign currencies Monday and might begin to rebound after the back-to-back weekly selling. [Recent Weakness in Dollar ETFs Only a Minor Setback]
Now, while the economy faltering, 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.
“Right now, it would be a pretty interesting entry point, if you are a long-term investor,” Lara Magnusen, portfolio manager at Altegris Investments Inc., said in the article. “We are shifting out of the fear of deflation, and moving into more of a reflationary world.”
Bank of America Merrill Lynch also warned that investors could be trapped in a transition period before the Fed starts normalizing its monetary policy, reports Julie Verhage for Bloomberg. Consequently, the bank argues that investors should hold gold to hedge against volatility ahead.
“Until (a) the US economy is unambiguously robust enough to allow the Fed to hike and (b) the Fed’s exit from zero rates is seen not to cause either a market or macro shock (as it infamously did in 1936-7), the investment backdrop will likely continue to be cursed by mediocre returns, volatile trading rotation, correlation breakdowns and flash crashes,” Bank of America Merrill Lync said in a note. “For this reason we continue to advocate higher than normal levels of cash, adding gold and owning volatility in mid 2015. Given extremities of liquidity, profits, technological disruption, regulation, income inequality…potential for a cleansing drop in asset prices cannot be dismissed.”
SPDR Gold Shares
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Full disclosure: Tom Lydon’s clients own shares of GLD.