The SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and other gold-backed exchange traded products traded slightly lower last week. Ahead of the upcoming Federal Reserve meeting, some data points indicate gold market participants lack conviction regarding the yellow metal’s near-term direction.
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.
“Nineteen market professionals took part in the weekly Kitco News Wall Street survey. There were eight votes, or 42%, calling for gold prices to fall over the next week. Another seven voters, or 37%, look for gold to rise, while four, or 21%, call for a sideways market or are neutral,” reports Kitco News.
The true effectiveness of gold during market downturns stands out when evaluating sustained sell offs in equity markets, compared to individual bouts of extreme volatility. For instance, during periods when the S&P 500 suffered a peak-to-trough drawdown of 15% or more since 1987, gold significantly limited downside drawdowns, with gold prices averaging 7.2% return while the S&P 500 averaged a total return loss of 25% over these sell-offs.
“Robin Bhar, metals analyst at Societe Generale, looks for the metal to fall ahead of the Federal Reserve meeting, then recover, ultimately finishing next week roughly where it is now. Down-then-up movement has been a pattern for some time now around meetings in which the Fed has hiked interest rates, a number of analysts have pointed out,” according to Kitco.
Investors who want access to precious metals may consider a number of physically backed metals-related ETFs as a way to diversify a traditional stock and portfolio, including ETFS Physical Swiss Gold Shares (NYSEArca: SGOL), ETFS Physical Silver Shares (NYSEArca: SIVR), ETFS Physical Platinum Shares (NYSEArca: PPLT) and ETFS Physical Palladium Shares (NYSEArca: PALL). ETF investors can also use the ETFS Physical Precious Metals Basket Shares (NYSEArca: GLTR) as a catch-all of all four precious metals.
Tom Lydon’s clients own shares of GLD.