Gold exchange traded products, including the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL), have recently been solid performers. For example, those ETFs are each up more than 8% year-to-date.
Gold’s recent bullishness is impressive when considering that the Federal Reserve raised interest rates earlier this month, setting the stage for two more rate hikes later this year. However, the yellow metal has been boosted by the dollar’s disappointing showing 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.
“The first thing to discuss in relation to gold is the relative strength of the U.S. dollar. Right now, we’re seeing the dollar near oversold levels on the RSI, a sharp change in momentum from what we saw just a few months earlier post-election,” according to a Seeking Alpha analysis of gold. “The dollar hit a low in line with the one experienced back at the beginning of February, lending support to gold. Right now, the trend in the U.S. dollar is still up, with that 200 DMA retaining a positive slope, but the 50 EMA is starting to show a trend down. Whether or not this is sustained depends on the reaction to the 100 level test.”
Gold prices could move modestly higher with some help from emerging markets, namely China and India. However, the dollar has recently retreated in noticeable fashion, helping aid gold’s ascent along the way.
Indian demand is vital for gold because the country is the second-largest buyer of the yellow metal behind China. 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. Still, 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.
“For the SPDR gold ETF, in particular, a breach of $120 will be the sign of a renewed uptrend, especially if we see that 200 DMA pick up out of its currently flat trend. Should $120 be breached, near-term upside looks to be $125, perhaps no later than a month, with $130 likely the upward bound by the end of Q2 2017,” according to Seeking Alpha.
For more information on the gold market, visit our gold category.
Tom Lydon’s clients own shares of GLD.