Gold exchange traded products, including the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL), could encounter some near-term turbulence as investors assess varying policies from the world’s major central banks.
For example, some investors are skittish regarding gold ahead of December’s Federal Reserve, at which the U.S. central bank is widely expected to raise interest rates for a third time this year.
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 has enjoyed greater demand in a low interest-rate environment as the hard asset becomes more attractive to investors compared to yield-bearing assets,” reports Bloomberg. “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.”
Related: ETFs Remain an Important Part of the Gold Story
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. Indeed, China is again gobbling up gold.
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.
“As the Fed starts to contract its balance sheet, other central banks are moving the same way. The ECB announced last month its bond buying will continue through September, although at 30 billion euros a month from January, half the current pace, while the Bank of England raised rates for the first time in more than a decade in November, and the People’s Bank of China will probably intensify efforts to pare back a record buildup of debt in the financial system,” according to Bloomberg.
For more information on the gold market, visit our gold category.
Tom Lydon’s clients own shares of GLD.