The SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL) and other gold-related exchange traded products were dragged lower late last week after a member of the Federal Reserve said the U.S. central bank should not wait too long before raising interest rates.
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.
Higher interest rates weigh on gold and other hard assets as the commodity pays investors nothing and struggles to compete with yield-generating assets when borrowing costs increase.
Data from the Commodity Futures Trading Commission indicate net long bets on gold for the week ending Sept.6 rose to nearly 308,000 contracts up from 276,300 contracts in the week prior. That is the highest level in two months.[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.
Fed funds futures imply limited probability the central bank will raise rates later this month, leading some market observers to say that, at most, there will be just one rate hike this year. Even that happens, some bond traders believe the Fed will not raise rates again until late 2017.
SEE MORE: Record Investment Demand for Gold ETFs
Silver, along with the ETFS Physical Silver Shares (NYSEArca: SIVR), has also mirrored the surge in gold in response to ongoing market volatility. Silver has exhibited a correlation of over 80% to gold and typically moves in the same direction as the yellow metal but in larger movements.
Net long positions in silver rose by 3,600 contracts for the week ending Sept. 6, according to CFTC data.
For more information on the gold market, visit our gold category.
SPDR Gold Shares
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.