A tightening Federal Reserve interest rate policy and a strengthening U.S. dollar are weighing on gold and precious metals exchange traded funds, but the sell-off may open opportunities.
For now, the precious metals market may continue to weaken as the greenback continues to appreciate.
“Looking at CFTC futures positioning, which is indicative of investor sentiment, it highlights that investors are not yet at peak bullishness for the US dollar nor are they at peak bearishness for gold that was witnessed at the end of 2015, just after the Fed’s first rate hike,” James Butterfill, Head of Research & Investment Strategy at ETF Securities, said in a note. “If we assume similar levels of sentiment for both the US dollar and gold then it suggests that gold could fall by 19% by year-end, bringing the gold price close to US$1070.”
Comex gold futures were trading at $1,133.0 per ounce Tuesday. As gold and precious metals continue to weaken, investors may find an opportunity to jump in.
“A pullback is an entry point for them to come back,” Maxwell Gold, Director of Investment Strategy at ETF Securities, told ETF Trends in a call.
Gold argued that gold prices could rebound and become more fundamentally driven going into 2017 after a rise in inflation and global economies rebound.
“Whilst the pressure on the gold price will be predominantly negative in the coming months we continue to believe there are sizable risks for 2017 that are likely to support the gold price,” Butterfill said.
About 82% of headline inflation moves in the U.S. can be attributed to crude oil price moves over the past four years, and the recent rise in crude prices could translate to year-end inflation close to 3%. While the Fed will push up rates to head off the inflation, policymakers will not be too aggressive on rates since the U.S. economic recovery could be derailed.
“An ineffective Fed would be supportive for gold in the longer-term,” Butterfill said.
Moreover, a stronger U.S. dollar could weigh on large multi-national companies’ overseas revenues. The potential damage to company earnings during the next reporting season could weigh on prices when optimism in the equity markets remain high, supporting a potential trade on safe-haven precious metals.
Other notable risks include rising populism in Europe and political uncertainty. President-elect Donald Trump still needs to make good on his promises and he faces an uphill battle with negotiating a higher debt ceiling.
Investors can gain exposure to precious metals through a number of physically backed ETF options, including ETFS Physical Swiss Gold Shares (NYSEArca: SGOL), ETFS Physical Silver Shares (NYSEArca: SIVR), ETFS Physical Platinum Shares (NYSEArca: PPLT) and ETFS Physical Palladium Shares (NYSEArca: PALL). ETF investors can also use the ETFS Physical Precious Metals Basket Shares (NYSEArca: GLTR) as a catch-all of all four precious metals.
For more information on the precious metals market, visit our precious metals category.