Thanks in part to the slumping U.S. dollar, the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and other gold-backed exchange traded products are soaring to start 2018 and some market observers believe more upside is in store for the yellow metal.
The U.S. Dollar Index is already down more than 3% to start 2018 after tumbling 9.1% last year. Other catalysts are supporting gold upside as well.
For instance, investors are somewhat apprehensive about President Donald Trump, wondering what he will do next. Meanwhile, geopolitical risks have fueled greater conservative bets, including North Korea saber rattling, the ongoing threat of the Islamic State, Russia’s territorial ambitions and unrest in Iran. Additionally, there is increased risks of a pullback in an extended bull market environment where valuations look stretched.
Last year, “gold’s annual gain was the largest since 2010, outperforming all major asset classes other than stocks. Contributing to this gain was a weaker U.S. dollar, stock indices hitting new highs and geopolitical instability, all of which fueled uncertainty. Investors continued to add gold to their portfolios to manage risk exposure, with gold-backed ETFs seeing $8.2 billion of inflows last year,” according to ETF Daily News.
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.
Inflation could serve as a catalyst for the yellow metal and for gold-related 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.
“Economies are on the rise with global growth increasing in 2017 and on track to continue the trend this year. China and India, two of the world’s largest consumers of gold, will see their economies and incomes grow due to the implementation of new economic policies,” according to the World Gold Council (WGC). “WGC research shows that as incomes rise, the demand for gold jewelry and gold-containing technology tends to rise as well. Investment and consumer demand for the yellow metal results in a lower correlation to other mainstream financial assets, such as stocks, making it an effective portfolio diversifier.”
For more information on the gold market, visit our gold category.
Tom Lydon’s clients own shares of GLD.