With stocks sliding this week, gold exchange traded funds, including the SPDR Gold Shares (NYSEArca: GLD) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL), are providing some refuge for investors.
For example, GLD, the world’s largest gold-backed ETF, is up more than 3% over the past week. Helping gold’s ascent is that the dollar remains lethargic, perhaps a sign investors currently prefer gold over the U.S. currency as a safe-haven investment.
Additionally, speculation intensified earlier this week that with U.S. economic growth still slow, the Federal Reserve may not be able to engage in further interest rate hikes this year. In fact, many bond market observers now see dwindling chances of a June rate hike.
“Central banks showed a diminished appetite for gold purchases; China’s purchasing program was on pause during the quarter as its foreign exchange reserves remained under pressure. Sales, once again, were sparse,” notes the World Gold Council. “Although inflows were just one-third of the extraordinary levels seen in Q1 2016, demand was firm. European-listed products were the most popular, due to continued political uncertainty in the region.”
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.
“Both gold and the dollar were moving in a similar type of triangle pattern. As they were approaching the apex it was clear that a new trend was about to start,” according to ETF Daily News. “Two weeks ago, gold started a breakdown, right at a time when gold miners flashed a bearish sign, leading us to conclude that gold would start a bearish trend. However, after two weeks, gold came back and re-entered its triangle pattern again, see the first chart. That happened right on the same day when the dollar broke down.”
Rising inflation could also prove to be a catalyst for gold ETFs. By some metrics, the Fed has under-estimated U.S. inflation, which could prove beneficial to gold because the yellow metal is historically a popular inflation fighter.
For more information on the gold market, visit our gold category.
Tom Lydon’s clients own shares of GLD.