The SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL) and other gold exchange traded products had a nice, albeit brief run as market participants speculated the Federal Reserve would not raise interest rates.
Those days are gone. Following the Fed’s October meeting market observers have reconfigured rate hike expectations to December, a view that has is proving damaging for gold and bullion-backed exchange traded products.
Gold is seeing greater support from safe-haven demand after currency devaluations across Asia added to investment demand for a better store of value than paper currencies or stocks and bonds. Bullion was recovering lost ground after dropping to a five-year low last month on concerns that the Fed would hike rates as early as September. Obviously, a rate hike for 2015 can now only happen in December.
Although precious metals ETFs have recently displayed some strength, gold is still in a lengthy bear market, giving some traders pause about how much more near-term upside the yellow metal has in store. [Doubters in Gold Rally]
“Andrew Burkly, head of portfolio strategy at Oppenheimer, said gold could be useful as a short-term currency hedge or a long-term inflation hedge. However, given the strength in the dollar and low inflation, neither trade would be applicable, Burkly said,” reports CNBC.
Gold assets look more attractive in a low interest rate environment as the precious metal is more competitive against assets that pay low interest, like bonds. Additionally, if the Fed holds off on a rate hike, it would suggests the economy is not as strong, which would also help gold attract safe-haven demand.
However, that safe-haven demand is likely to wane as Treasury yields. Rising Treasury yield usually bolster the U.S. dollar and with commodities such as gold denominated in dollar, a stronger greenback crimps commodities prices.
“As market watchers have upped the possibility of an interest rate hike in December, he said, Fed expectations will continue to weigh on gold and other commodities,” adds CNBC.
SPDR Gold Shares
