The SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and other gold-backed exchange traded products have traded modestly higher over the past week and month, prompting some market observers to opine that the yellow metal could potentially rally in significant fashion as equity markets remain calm.
The yellow metal has recently been pressured by, among other forces, a slight uptick in the previously sliding U.S. dollar and expectations that the Federal Reserve will raise interest rates for the third time this year at its December meeting.
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. Interest rates remain low in many developed markets and some emerging markets have been rapidly lowering borrowing costs this year.
“Gold, which is on pace for its largest yearly gain since 2010, has been mimicking the atypical low volatility environment of the stock market. Gold prices are up more than 12 percent this year,” reports CNBC. “The big question: Could a volatility surge have a positive effect on the precious metal?”
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Since the 1970s, gold has returned an average 10% per year, comparable to the S&P 500 average price performance. Over the past 10 to 20 years, gold has also held up, supported by important structural changes in the market, like the economic expansion of emerging markets, increased use of gold as part of foreign reserves by central banks and the rising popularity of gold-backed ETFs.