Gold ETFs have been helped this year by, among other factors, low interest rates throughout the developed world and the slumping U.S. dollar. Just look at the top performing SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL).
Investor demand still remains an integral part of the gold equation, too. 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.
“Breaking a long trend, demand for gold jewelry in China and India has plummeted in recent years,” said Morningstar in a recent note. “But despite this massive decline in the largest single source of gold demand, prices have risen, largely due to strong investor demand. In the face of ongoing interest-rate hikes by the U.S. Federal Reserve, ETF holdings have risen to levels last seen in 2013.”
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.
Related: Gold ETF Catalysts to Watch in Weeks Ahead
Another possible catalyst for gold entering the back of the year is lingering debate surrounding how many times the Fed can raise rates this year – one more is what many traders are betting on, and in 2018, three seems to be the bet there. Importantly, more investors are being lured to gold.
“However, continued rate hikes threaten to reverse near-record ETF inflows, as still-manageable inflation would push real interest rates well above levels that attract investor interest,” according to Morningstar. “We expect gold prices to fall through 2018, before increased Chinese and Indian jewelry demand catalyzes a rebound. Investor outflows can strike suddenly, but a full recovery in jewelry sales will take time.”
For more information on the gold market, visit our gold category.
Tom Lydon’s clients own shares of GLD.