The SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and other gold exchange traded funds are often viewed as safe-haven destinations, but the yellow metal finished lower in May even amid intensifying speculation that Italy is on the cusp of leaving the European Union.
GLD is the largest physically backed gold ETF on the market, providing investors exposure to gold price movement in an easy-to-use investment vehicle. The ETF is backed by physical gold bars stored in London vaults. The gold trust currently holds about 27.2 million ounces of gold, so each SDPR Gold Shares represents fractional ownership of the underlying gold.
“Given recent developments, it seems unlikely we will have better visibility in the coming months, particularly if new elections are in the pipeline. As a consequence, we would expect international investors to stay on the sidelines at least until the political turmoil cools,” SocGen strategists said, reiterating their underweight stance on Italian stocks, according to MarketWatch.
If the chaos currently seen in Italy spreads to other countries in the region, that could spark gold higher.
“If the crisis continues and leads to an election that threatens whether Italy keeps the euro as its currency – and this sentiment spreads to other European nations — gold is likely to draw significant safe-haven buying, particularly if equities go into a freefall, analysts said,” reports Kitco News.
Other Challenges
Another issue for gold is that the Federal Reserve meets in June and is widely expected to boost interest rates at that meeting, which would likely be a negative for gold. Over the past several years, gold has often declined heading into Fed meetings when investors widely expected a rate increase.
If Eurozone woes translate to dollar strength, that could limit gold’s upside because the yellow metal is denominated in dollars.
“Yet, the upside in gold – in U.S. dollar terms anyway — may end up being limited if the turmoil should also result in dollar strength, since the precious metal tends to move inversely to the U.S. currency,” according to Kitco. “Traders will be watching to see if there is safe-haven buying of U.S. bonds, a sell-off in the euro or further declines in equities, all of which can affect precious metals.”
For more information on the gold market, visit our gold category.
Tom Lydon’s clients own shares of GLD.