Gold is off to a fine start this year as illustrated by year-to-date gains of over 7.5% for gold exchange traded products, including the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL). Some market observers believe the yellow metal can keep climbing.
Gold ETFs have also been grappling with the surprising results of the U.S. presidential election. Investors widely expected gold to rally if Republican Donald Trump won the presidential election in November, 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.
Gold saw renewed safe-haven demand, especially as more traders grow cautious on speculation that Trump’s policies may not move forward in a timely fashion.
Precious metals also strengthened after data out earlier this month revealed U.S. wage growth slowed, which diminished the chance of a Federal Reserve interest rate hike this year.
“The primary drivers of the “Trumped Up,” or bullish, portion of our thesis are the proliferation of uncertainty, persistent external volatility, and numerous policy unknowns. We expect these drivers to skew upward in size but downward in cadence as the market gets a better handle on how to grapple with the new environment,” according to an RBC note posted by Dimitra DeFotis of Barron’s.
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.
“On the other hand, the pillars of the “Trickle Down,” or bearish, portion of our thesis collectively create a headwind that should keep gold from having a breakout repeat of what happened in the first half of 2016. To be clear, we do not think these bearish drivers will overwhelm the up-moves in gold this year, but we do think they will handicap them,” according to the RBC note featured in Barron’s.
For more information on the gold market, visit our gold category.
Tom Lydon’s clients own shares of GLD.