Gold ETFs, including the SPDR Gold Shares (NYSEArca: GLD), the iShares Gold Trust (NYSEARCA: IAU) and the SPDR Gold MiniShares (NYSEArca: GLDM), have recently traded modestly lower, but there’s a near-term case to revisit these funds.
Sure, some of that case involves the Federal Reserve potentially lowering interest rates later this month. Gold ETFs are pushing to the upside amid increased expectations of a U.S. rate cut, even as some investors locked in profits from bullion’s recent rally. Gold is believed by many investors to be inversely correlated with interest rates. Rising interest rates make bonds and other fixed-income investments more attractive so that the money will flow into higher-yielding investments, such as bonds and money market funds, and out of gold, which offers no yield at all during times of higher interest rates, and back into gold ETFs.
However, an international catalyst could restore some shine to bullion ETFs over the near-term: the Indian holiday Diwali, also referred to a the festival of lights.
“Gold tends to shine bright during the second half of the year as demand picks up,” said S&P Dow Jones Indices in a recent note. “It is estimated that Diwali accounts for approximately one-fifth of annual gold purchases in India—more than any other time of the year. Jewelers and gold coin dealers in India frequently see a spike of 20%-30% in sales leading up to the festival.”
What’s Happening Now
Investors rushing to GLD, GLDM and related ETFs as a quick and easy way to gain exposure to gold price movements as they hedge against market risks, help protect their purchasing power in times of inflationary pressures or capitalize on increasing demand from the emerging markets with a growing middle-income class.
As for India’s impact on the gold market, data confirming that impact is massive.
“India is the second-largest consumer of gold after China, although they are close in size, with each accounting for approximately 30% of net global imports of the yellow metal in 2017,” according to S&P Dow Jones Indices. “Gold is the second-largest import in India after crude oil, illustrating how important the country is to the global gold market and likewise how important it is for Indian consumers to appreciate the global supply/demand dynamics of gold.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.