The SPDR Gold Shares (NYSEArca: GLD), the world’s largest gold-related exchange traded product, traded modestly higher last week, but the major gold ETF is higher by about 4% over the past month and some traders appear comfortable betting on more upside for bullion and the related ETFs.
The good news for gold ETFs is that inflation could serve as a catalyst for the yellow metal. 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.
“Due to increasing worries surrounding President Donald Trump, fear has found its way back into U.S. markets, weighing down stock prices and boosting stock market volatility. As a result, there appears to be increasing demand for safe-haven assets like gold, with gold futures just topping $1,300 per ounce for the first time in 2017. In fact, according to BofA-Merrill Lynch (BAML) data, precious metals just saw their largest inflows in 10 weeks. In the meantime, options traders have been targeting GLD,” according to Schaeffer’s Investment Research.
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.
“GLD call options have been popular in recent weeks, with the ETF’s 10-day put/call volume ratio of 2.07 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) ranking above 70% of all other readings from the past year. This trend is continuing today, with call volume outpacing put volume 51,000 to 36,000,” notes Schaeffer’s.
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While the dollar has been one of the worst-performing developed market currencies this year, which has assisted gold at various points during the year, some currency traders believe the dollar can rebound. However, there are ways for investors to prosper with the yellow metal even if the dollar rallies.
Moreover, in the face of a stronger dollar and speculation that the Federal Reserve could raise interest rates over the mid- and long-term, gold prices could still move modestly higher with some help from increased demand out of the emerging markets, namely China and India.
For more information on gold, visit our gold category.
Tom Lydon’s clients own shares of GLD.