There’s no denying gold ETFs, such as the SPDR Gold MiniShares (NYSEArca: GLDM) and SPDR Gold Shares (NYSEArca: GLD), are on torrid paces this month. For example, GLD, the world’s largest bullion-backed ETF, is higher by more than 8% in August, but gold’s meteoric rise has some market observers concerned about a near-term pullback.
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.
“Investors flocked to the precious metal this week, pushing prices to $1,552 an ounce, as the yield curve inversion deepened and again set off recession alarm bells. Deutsche Bank analysts said in a note Tuesday that global central banks’ move to gold investments and away from the U.S. dollar should also continue to support prices,” according to CNBC.
Crowded Gold Trade?
Investors have looked 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.
While gold ETFs appear to have the wind at their backs, some technical indicators say the yellow metal is poised for a near-term retreat.
“However, on a shorter-term basis, if you look at the GLD, you look at its weekly RSI chart, it’s more overbought than it even was back at the 2011 highs. You got to go back to 2006 to see a time when it was more overbought,” said Miller Tabak equity strategist Matt Maley in an interview with CNBC.
The case for gold was certainly assisted by the Federal Reserve who implemented a rate cut of 25 basis points recently. The weakness in the U.S. dollar caused gold to climb, but the case for the precious metal is also coming from the bond markets with over $15 trillion in negative-yielding debt floating around the world.
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