Here's What Could Spark a Gold Rebound

Gold’s 2018 struggles are by now well-documented. The SPDR Gold Shares (NYSEArca: GLD), the world’s largest gold exchange traded fund, is lower by nearly 8.60% year-to-date, stoking investors’ concerns regarding when and how the yellow metal will bounce back.

Investors have been shunning physical assets like gold in face of further interest rate tightening out of the Federal Reserve amid a robust U.S. economy. Fed Chairman Jerome Powell said earlier in August that gradual rate hikes will come, and with inflation still low, there was little concern over the economy overheating.

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Earlier this week, the Fed raised interest rates for a third time this year, possibly dealing another blow to gold. Gold does not pay a coupon, dividend or interest, making it vulnerable to rising interest rates. Still, there are scenarios that could see gold rally, including short covering.

“In recent years, a substantial increase in short positions has been followed by a sharp rally in gold,” said Juan Carlos Artigas, director of investment research at the World Gold Council (WGC), in a recent note. “And while net shorts were more prevalent in previous decades, there have been structural changes that may make these positioning levels different and likely short-lived.”

Other Factors for Gold

While gold has betrayed its safe-haven status this year, increased financial market risk and volatility could lead investors back to the yellow metal.

“Many market participants have questioned why gold has failed to benefit from recent market turmoil. But in reality, it has. Gold has allowed foreign investors to hedge risks associated with a depreciating currency—for example, the euro, Chinese yuan or Turkish lira,” said Artigas. “Historically, risks that have been contained within an industry or region—even with an accompanying surge in local gold demand—have not been enough to push gold prices higher in US dollar terms. When these risks become widespread, flight-to-quality flows have resulted in higher dollar gold prices and reduced portfolio losses.”