There is still plenty of focus on when the Federal Reserve will boost interest rates, a scenario some market observers could happen in December, if then.
Even then, one rate hike, while potentially providing a near-term shock to gold, probably will not derail exchange traded products such as the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL).
Gold has enjoyed greater demand in a low interest-rate environment as the hard asset becomes more attractive to investors compared to yield-bearing assets. However, traders lose interest in gold when rates rise since the bullion does not produce a yield.
Looking ahead, investors will be waiting on Wednesday’s minutes from the most recent Federal Open Market Committee meeting.
If the FOMC minutes reveal a more hawkish Fed stance with an imminent interest rate hike, gold assets could take a major blow. Consequently, traders may consider short or inverse gold ETF options to hedge against a potential turn.
Gold and gold-related assets, including miners exchange traded funds, fell Wednesday after the release of the Federal Reserve’s July meeting minutes that revealed the U.S. central bank is comfortable with the idea of raising interest rates.
However, it must be noted that the Fed did not give a specific timeframe for when it could raise rates again. As investors have already learned this year with gold and gold miners, the longer rates stay low, the better for gold-related assets.
Some market observers see gold continuing to move higher through the latter stages of 2016.
Fed Fund futures are pricing in a 9% chance of a rate increase for the September, while the odds of an increase in December fell to 46%, down from 53% just a day earlier. Gold has found support from the weaker greenback, however the enthusiasm could be tempered by uninspiring economic data in the US and overseas. Japan’s flat GDP growth and weaker retails sales in the US have cast doubt over global economic growth, which limits Gold’s potential as an inflation hedge,” according to OptionsExpress.
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Total gold demand, which includes usage in jewelry manufacturing and the industrial sector, for the first half was 2,335 metric tons, the second highest on record.
Preliminary data also revealed inflows into gold continued unabated at the start of the second half, with an additional 80 metric tons added in July.
For more information on the gold market, visit our gold category.
SPDR Gold Shares
Tom Lydon’s clients own shares of GLD.