Few exchange traded funds (ETFs) have benefited from the weaker dollar and the Federal Reserve’s reluctance to raise interest rates this year on par with the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL).
However, that does not mean gold and gold ETFs are not drawing criticism. Actually, there have been plenty of naysayers as the aforementioned gold ETFs have notched stellar year-to-date showings. And with the dollar strengthening in recent days and expectations rising that the Fed will boost rates in June, there are some concerns gold ETFs could be vulnerable to near-term pullbacks.
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Gold ETFs were depressed last year ahead of the Federal Reserve’s first interest rate hike in almost a decade. However, with the Fed signalling a more cautious monetary policy amid sluggish growth, gold is finding further support from a prolonged low-rate environment. Nevertheless, if the Fed does hike rates, investors will have to look to real interest rates.
[related_stories]Some analysts still believe that is possible gold ascends to $1,500 per troy ounce. Gold bullion prices have surged almost 20% this year as the Fed previously signaled it would slow the pace of interest rate normalization this year – higher interest rates typically weigh on gold prices since the hard asset provide no yield and would become less attractive to higher-yielding conservative debt assets in a rising rate environment.
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Demand for gold assets have surged this year. For instance, ETF flows into gold have expanded at their fastest pace since 2009. Physically backed gold ETF holdings are still one-third below the December 2012 peak, which suggest that prices can hold at about $1,200 per ounce.
Still, investors should be mindful of the technical outlook for gold.
“Over the past 6-months, Gold could be creating a rising wedge pattern. This pattern two-thirds of the time, suggests lower prices are ahead,” says Chris Kimble of Kimble Charting Solutions. “If history is to come true per this pattern, support needs to be taken out at (1) above. If support does give way, selling pressure could increase. The pattern in the US$ looks almost the polar opposite (bullish falling wedge resistance test in play).”
For more information on the Gold ETFs, visit our Gold category.
SPDR Gold Shares
Tom Lydon’s clients own shares of GLD.