With the banking system on shaky ground and a more dovish U.S. Federal Reserve on the horizon, traders are placing bets on another gold rally.
Gold prices are up 8% for the year, surging within the past week after cracks were revealed in the banking system after rescues of European bank Credit Suisse and U.S.-based First Republic Bank. Gold prices pushed upwards past the $2,000 mark in an investor flight to safety.
Furthermore, trading activity hints at more gold rallies ahead. According to the Financial Times, “trading in options contracts linked to the metal suggest many investors are expecting a more sustained rally in the weeks ahead.”
Citigroup is also noticing that there’s been heightened activity for gold via various conduits. This includes futures contracts, exchange-traded funds (ETFs), and options contracts.
“The big catalyst has been the stress in the regional banking system in the US . . . [and]it has been pretty much one-directional buying,” said Aakash Doshi, head of commodities for North America at Citigroup.
Gold Price in US Dollars data by YCharts
Direct Exposure or a Backdoor Option
Investors can get gold exposure whether they’re looking for direct access or a backdoor option via miners with funds from Sprott. For the former, consider the Sprott Physical Gold Trust (PHYS), which is a fund that provides an enhanced physical bullion structure, offering the ease of purchase and sale that comes with being traded on an exchange.
For a backdoor play on ancillary gold services, investors can also consider the Sprott Gold Miners ETF (SGDM). If demand continues to rise for gold, this can have a domino effect on miners for indirect exposure to gold prices.
Per SGDM’s fund description, the ETF seeks investment results that correspond generally to the performance of its underlying index, the Solactive Gold Miners Custom Factors Index. The index aims to track the performance of larger-sized gold companies whose stocks are listed on Canadian and major U.S. exchanges.
The index uses a transparent, rules-based methodology designed to emphasize larger-sized gold companies with the highest revenue growth, free cash flow yield, and the lowest long-term debt to equity. The index is reconstituted on a quarterly basis to reflect the companies that have the highest factor scores.
Both funds can benefit from economic forces pushing gold prices higher, especially if the U.S. Federal Reserve dials down the aggression on rate hikes. The Fed recently instituted its ninth rate hike, but acknowledged that future rate increases are not certain.
“If we’re at the end of a rate hiking cycle, there’s much more scope for upside,” said Suki Cooper, precious metals analyst at Standard Chartered.
For more news, information, and analysis, visit the Gold/Silver/Critical Minerals Channel.