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 traded slightly lower to start May, but the yellow metal is coming off an interesting April.
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.
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. France’s presidential election adds to the case for gold. The final round of France’s presidential election is May 7th.
Geopolitical uncertainty often stokes interest in gold and the related ETFs. However, a Le Pen loss in the French election next month could boost the euro against the dollar. That could be of some assistance to gold, which is denominated in dollars.
“All metals except gold lost in April, which hasn’t happened since May 2010 and has only happened 6 times in history (since lead, the last metal was added in Nov. 1994.),” said S&P Dow Jones Indices in a recent note. “Gold was not just the only positive metal in April, but was the only commodity of all 24 in the S&P GSCI in backwardation. This is the first time in history that gold was the only backwardated commodity (since 1978 when gold was added into the index.) Backwardation is a condition describing the forward curve where the contract with a nearer expiration date is priced higher than the contract with a later expiration date.”
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.
“The backwardation in gold reflects high demand for the metal, which many investors flock to as a safe haven. Since gold has historically zero correlation to the S&P 500 (0.02) and very little to the S&P GSCI (0.18) (using monthly data since Jan. 1978,) it has provided a diversification benefit to investors using equities and other commodities,” according to S&P Dow Jones.
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Tom Lydon’s clients own shares of GLD.