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 enjoyed solid performances last week on the back of the November jobs report. However, investors should be careful if they expect a lengthy move higher for downtrodden gold ETFs.
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]
“Driving gold’s steep decline is the increased expectation of a rate hike at the Federal Reserve‘s next policy meeting, Phillip Streible of RJO Futures said Monday. Market watchers are also keeping a close eye on the November jobs report to be released Friday as another indicator of whether the U.S. central bank will move in December,” according to CNBC.
Making matters worse for gold ETFs are expectations for soft near-term demand at a time of year when gold demand is usually strong.
“Since gold tends to trade inversely to the U.S. dollar, a notable drop in the currency would translate into a boost for the yellow metal. But Andrew Burkly, head of portfolio strategy at Oppenheimer, said the big currency move mainly had to do with adjusting for short positions,” reports CNBC.
Gold futures and physically-backed ETFs have been pressure this year amid speculation the Federal Reserve is preparing to raise interest rates, which has pushed the dollar higher. Higher interest rates would diminish gold’s attractiveness since the precious metal does not pay interest like fixed-income assets.
Even if rates rose a couple basis points, the continued low rate environment is good for gold, which does not pay a yield and would struggle to compete with yield-generating assets when rates rise.
“Gold, which is widely considered an inflation hedge, has yet to become attractive to investors, Burkly said. Thanks to low oil prices and sluggish economic data, inflation doesn’t look like it’s going to be picking up anytime soon, he said,” according to CNBC.
SPDR Gold Shares
Tom Lydon’s clients own shares of GLD.