Some commentary on gold and the related exchange traded products, such as the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL), seen last month might lead some investors to believe the yellow metal’s upside has been exhausted.
In reality, the declines recently experienced by the major gold ETFs were modest and it can be argued that the stage is set for commodities to climb higher as upside for the dollar appears limited. Gold and gold-related assets, including miners exchange traded funds, fell 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.
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Gold, like other commodities products, is benefiting from the slumping U.S. dollar. However, some believe the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), which tracks the price movement of the U.S. dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc, that without the assistance of a rate hike from the Federal Reserve, the dollar’s near-term prospects are limited.
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.
[related_stories]“Looking at the charts the U.S. dollar looks like it is on the precipice of another breakdown. If this breakdown comes to fruition, we should see the price of gold move into an accelerated up-trend with the potential to see $1,700 / oz in 2017,” according to a Seeking Alpha analysis of gold and the dollar.
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.
SEE MORE: Record Investment Demand for Gold ETFs
Specifically, investment in gold jumped to 448 metric tons in the second quarter, or more than double the figure of the same period year-over-year, largely due to a year-over-year increase in ETF investment to 236.8 metric tons, compared to a 23 metric ton outflow the year prior.
“In my opinion this is a positive for gold bulls as the weak and impatient hands are exiting the trade. The current sentiment level has lots of room to move higher and could easily support another $100 / oz move in the price of gold without sentiment readings moving into overly optimistic levels,” adds Seeking Alpha.
For more information on the gold bullion market, visit our gold category.
SPDR Gold Shares
