Gold and the corresponding exchange traded products, including the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL), have been decent performers to start 2017 after stumbling late last year but familiar headwinds linger for the yellow metal.
Notably, those headwinds include the strong dollar and the Federal Reserve’s outlook for interest rates, which could include multiple rate hikes this year.
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.
In the face of a stronger dollar and speculation that the Federal Reserve could raise interest rates as many as three times this year, gold prices could move modestly higher with some help from emerging markets, namely China and India.
“Should the value of the Dollar continue to rise and/or interest rates move higher, both factors are generally viewed as a negative for Gold price. Analysts who follow the movement of assets into and out of the Gold ETF’s note that we are still seeing an outflow from investors from the major Gold ETF’s, so it appears that market participants remain hesitant to shift assets back into Gold anytime soon,” according to Options Express.
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, could be set to lower its import tax on bullion, which could be major catalyst for gold prices.
Gold’s technical outlook is also tepid at best.
“Gold prices to nearly 7-week highs on Thursday, but saw prices give up the gains by the end of the session. While prices are holding above the 20-day moving average, the market is still well below the 200-day moving average, which is currently near the 1274.00 price level. While the 14-day RSI remains strong, with a current reading above 60, we may start to see this momentum indicator turn lower unless a new-multi-week high is made to end the week. The November 16 high of 1236.10 now appears to be the next major resistance level for the February contract, with chart support seen at the January 5 low of 1163.60,” adds Options Express.
For more information on the gold market, visit our gold category.
Tom Lydon’s clients own shares of GLD.