Gold and gold exchange traded products, including the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL), are struggling.
As the yellow has retreated in recent weeks, market observers have frequently cited the suddenly strong U.S. dollar and the specter of rising interest rates as reasons for gold’s malaise.
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.
Investors widely expected gold to rally if Republican Donald Trump won the presidential election earlier this month, which he did, but that thesis proved incorrect. Democratic challenger Hillary Clinton may have actually been the preferred victor for gold ETFs because historical data suggest gold performs better when Democrats are in the White House.
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.
India, one of the world’s largest gold consumers, looms large for gold ETFs.
“Three years ago; India’s previous government began radically curbing gold imports, culminating in a near-total ban in gold imports to the world’s greatest gold-lovers, and second-largest population. As was explained at the time , the ban on gold was for no reason in terms of economic fundamentals,” according to ETF Daily News.
Related: Bullish Forecast for Gold ETFs
Gold trading volumes have already surged in Asia. For instance, in China, SGE volumes jumped to 330 metric tons, or 102% higher than the level seen around the Brexit vote, according to the World Gold Council. Moreover, anecdotal evidence suggests that institutional investors and hedge funds have yet to jump in, which indicates that gold demand has more room to run.
“While this current push in India will have no long-term effect on the gold market, the potential for a short-term disruption of imports into that nation is acknowledged. In this respect the timing of the latest announcement from the One Bank’s puppets in India is interesting,” according to ETF Daily News.
For more information on the gold market, visit our gold category.
Tom Lydon’s clients own shares of GLD.