Gold exchange traded products, such as the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL) struggled in the fourth quarter, but broadly speaking, gold was a solid idea during 2016.
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.
The Federal Reserve’s first interest rate hike of 2016 in December and subsequent speculation that three more rate hikes are on the way this year weighed on gold and other precious metals as the dollar rallied.
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.
GLD, the world’s largest exchange traded fund backed by holdings of physical gold, rose 8% last year while adding $7.35 billion in new assets. Only five ETFs added more new assets in 2016 than did GLD.
Last year represented gold’s “first annual gain since 2012. For the year the average gold price came in at $1,247 an ounce, compared to 2015’s average of $1,160, but nowhere near 2012’s $1,689,” reports Frik Els for Mining.com. “Gold came under huge pressure after the US elections on November 8 as investor money rotated out of gold and into stocks.”
Fueling the gold bet, the global zero or negative interest rate policies have pushed investors toward the hard asset as a better store of wealth, with demand surging to the second-highest level ever in the first quarter, according to the World Gold Council. Moreover, lingering global volatility has also helped support gold as a safe-haven asset.
“Previous cycle lows have been 1.9 ounces in February of 1933 and 1.3 ounces in January of 1980 when gold in inflation-adjusted terms hit an all-time high of roughly $2,400 an ounce. When the nominal price of gold hit a record high above $1,900 in August 2011 the ratio was 6.4. That compares to highs around 40 between mid-1999 when gold reached lows of $250 an ounce and mid-2001,” according to Mining.com.
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