The SPDR Gold Shares (NYSEArca: GLD), the world’s largest exchange traded fund backed by physical holdings of gold, has surged more than 12% to start 2016. While that is an impressive showing, GLD and rival gold exchange traded products remain mired in bear markets, indicating there is more work to be done.
However, bullion’s bounce has not convinced all market observers that a sustained rally is in store. 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.
Gold has been in a 3-year bear market, which has seen failed rallies on the back of various news events. Continued strength in the US economy and labor market has offset political and economic events since the Gold market turned bearish in 2013.
“Typically, we will see the series of lower highs and lower lows that define a bear market end with the first higher high and higher low. As of Monday, that has not happened. Gold touched $1,200 per ounce, which was a hair above the previous high set in October 2015, but in the context of a long bear market that is not a significant breakout,” reports Michael Kahn for Barron’s.
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.
Negative interest rates throughout the developed world are also seen as a catalyst for gold upside.
“The basic idea is that gold and cash compete for a similar pool of investors’ money. If the central banks implicitly or explicitly causes cash to yield negative returns, then gold will look better in comparison,” according to CNBC.
“The rally from the December low is continuously accelerating and short-term RSI readings are clearly showing overbought conditions. Therefore, bulls might be jumping into an emotionally charged market that needs to calm down in order to put together a sustainable advance,” adds Barron’s.
SPDR Gold Shares
Tom Lydon’s clients own shares of GLD.