The SPDR Gold Shares (NYSEArca: GLD) and other gold-related exchange traded products have been surprisingly sturdy following last week’s news of the Federal Reserve’s first rate hike of 2017. In fact, gold has been a steady performer among commodities this year as highlighted by GLD’s year-to-date gain of more than 8%.
That could translate to more good news for often volatile gold miners equities and exchange traded funds such as the VanEck Vectors Gold Miners ETF (NYSEArca: GDX) and the VanEck Vectors Junior Gold Miners ETF (NYSEArca: GDXJ).
Although many market participants still expect the U.S. central bank to boost borrowing costs multiple times this year, investors are renewing their affinity for gold ETFs early in 2017. 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. However, the dollar has recently retreated in noticeable fashion, helping aid gold’s ascent along the way.
“Balance this against rising demand for gold from a growing middle class in Asia. Countries including China and India have a cultural affinity for gold. The more people rise out of poverty, the more luxuries they can afford,” reports ETF Daily News.
GDX is comprised of global gold miners, with a notable tilt toward Canadian and U.S. mining companies. Nevertheless, gold assets may have further room to fall if the U.S. dollar and real bond yields continue to rise.
Additionally, there is at least one positive fundamental catalyst that potentially bodes well for gold miners ETFs going forward: Peak production of gold has likely come and gone, perhaps indicating that supply will dwindle, thereby boosting bullion prices.
The idea of peak gold is the fact “the fact that gold mine supply seems to have peaked after years of crushingly low bear-market prices. You can’t turn on mines with the flip of a switch. It takes years. So, tight supply squeezes prices higher,” according to ETF Daily News.
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.
For more information on the gold market, visit our gold category.
Tom Lydon’s clients own shares of GLD.