Gold exchange traded funds, such as the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL) have recently been plagued by a rebounding U.S. dollar, which has been stoked by speculation that the Federal Reserve could boost interest rates in June or July.
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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Although the stronger dollar is a drag on gold and other commodities, bullion’s demand fundamentals are supportive of more upside.
[related_stories]“The World Gold Council in its latest demand trends report showed ETF investors who’ve been stocking up on the metal right out of the gate in 2016 were behind the best ever first quarter for the metal and the second largest quarter on record after Q1 2009. The jump was entirely driven by investment demand which was 122% higher than Q1 2015 and increased three-fold quarter on quarter,” reports Frik Els for Mining.com.
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.
“Jewelers in India kept shutters down for almost a month-and-a-half against the proposed 1% excise duty on non-silver. Interestingly, the end of jewelers’ strike in India has coincided with a drop in prices. More important, it is also the buying season in India. In addition, a normal monsoon is expected in India, which is a key for robust gold demand in the country. When you consider all these factors, gold’s outlook does not look that bad. I believe that the precious metal will get support from physical demand. While gold could see a pullback ahead of the Fed meeting, anticipated strong physical demand means that the downside is not likely to be significant,” according to a Seeking Alpha analysis on gold.
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However, emerging market demand for gold has not picked up yet. For instance, China has shown little demand, with the Shanghai Gold Exchange seeing little growth in volume. While the higher prices may have deterred Asian buyers, demand could pick up if prices persist in going higher, analysts said.
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SPDR Gold Shares
Tom Lydon’s clients own shares of GLD.