With gold’s status as a safe-haven investment, it stands to reason that in turbulent markets, exchange traded funds such as the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and the ETFS Physical Swiss Gold Shares (NYSEArca: SGOL) would shine a little brighter.
That has been the case to start 2016 those gold ETFs have each posted gains of just over 2%. It may not sound like much, but it is impressive when considering the S&P 500 is down more than 9% over the past month. Gold futures and physically-backed ETFs were pressured last 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. Making matters worse for gold ETFs are expectations for soft near-term demand at a time of year when gold demand is usually strong. [Doubters in Gold Rally]
However, investors are renewing their previous affinity for gold ETFs and there could be more upside on the way if sellers abandon hopes that the yellow metal has more downside in store.
“Nikolaos Panigirtzoglou at J.P. Morgan notes that gold ETFs took in about $900,000 during the week ended Jan. 13, the most recent week available. For the sake of comparison: Some $3.6 billion was pulled from gold ETFs last year, representing about 7.4% of total assets under management,” reports Chris Dieterich for Barron’s.
The Barron’s report goes on to cite a fund manager that says if gold ETFs continue adding new assets, the short gold thesis could incur further damage, forcing traders that are short the yellow or the ETFs to cover those positions. In turn, that scenario could lead to higher prices.
A potential problem for gold this year is that some market observers believe the Fed charting a course for more rate hikes, though at a measured pace, in 2016 sets the stage for further upside in the U.S. dollar. Of course, that would be punishing for gold and other commodities, which are denominated in dollars.
SPDR Gold Shares
Tom Lydon’s clients own shares of GLD.