Gold prices and the SPDR Gold Shares (NYSEArca: GLD), the largest bullion-backed exchange traded fund in the world, rose modestly Wednesday after the Federal Reserve left interest rates unchanged. The Fed figures prominently in gold’s ability to deliver more upside after being solid to start 2016.
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]
Still, some options traders appear comfortable betting that GLD has more near-term upside in store.
“On Tuesday, when gold gained more than 1 percent, one trader spent more than $13 million on a bet that the SPDR Gold ETF, the GLD, would rise to levels not seen since May 2015 in the next two months. Specifically, that trader purchased 75,000 of the March 108/117 call spreads for $1.80 each. Since each options contract accounts for 100 shares of stock, this is a $13.5 million bet that the GLD will rise more than 9 percent by March expiration,” reports CNBC.
Investors pulled $2.2 billion from GLD, the world’s largest bullion-backed ETF last year, after pulling $3.2 billion from the fund in 2014. To start 2016, the trend of gold ETF outflows is abating as investors have poured more than $956 million into GLD.
“Gold has been in a precipitous decline for the last three years, falling more than 32 percent during that period,” according to CNBC.
“Interest in the precious metal is being driven by demand for a safe haven after losses spread across Chinese and U.S. equity markets and oil dipped below $30 a barrel. Also helping the case for gold: China boosted reserves for the sixth straight month in December amid price declines through the end of last year, according to the People’s Bank of China,” reports Bloomberg.
SPDR Gold Shares
Tom Lydon’s clients own shares of GLD.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.