Up 17.6% year-to-date and easily ranking as this year’s top asset-gathering ETF, the SPDR Gold Shares (NYSEArca: GLD), the world’s largest physically-backed gold exchange traded fund, is leaving little about just how hot gold and gold ETFs are.
However, gold’s rally has been accompanied by doubts, as is often the case when the yellow metal soars.
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.
However, that issue was quelled a bit last week when the Fed, as expected, did not raise interest rates. More importantly, it looks as though the central bank will only raise rates, at the most, twice this year. Heading into 2016, many market observers expected four rate hikes, which could have been damaging to gold’s potential upside.
“Conversely, the Fed announcement came at an opportune time for Gold traders. It seems as though some traders were cooling a bit on Gold prices. The metal’s value as a defensive instrument was high to start the year. Lately, the defensive value has been eroding due to better economic outlooks in Europe and the US. The economic optimism is not strong enough to drive inflation hedging, and global growth potential seems to have a low ceiling in 2016. It is an awkward spot for Gold,” says OptionsExpress.[related_stories]
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.
However, the sell gold now thesis ignores the facts that the yellow metal is well off its highs set several years and that gold entered 2016 locked in a three-year long bear market. Less than three months of rallying this year does not erase those facts.
“Turning to the chart, we see the rally in April Gold starting to stall. The recent closes below the 20-day moving average suggest that a near-term high may be in place. This is supported by the failure of the April contract to retest recent highs,” adds OptionsExpress.
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.