The U.S. dollar was one of last year’s worst-performing major currencies, a theme that is extending to the early stages of 2018. That is good news for gold and gold exchange traded products, which are starting the new year on strong notes thanks in part to the slack dollar.
The SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and other gold-backed exchange traded products have traded modestly higher over the past week and month, prompting some market observers to opine that the yellow metal could potentially rally if the dollar continues dithering.
GLD “kicked off 2018 with an advance of 1.2 percent on Jan. 2, extending its streak of gains to 11, a record. It retreated slightly at the start of regular trading on Jan. 3, but is still up for the year,” reports Luke Kawa for Bloomberg.
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, a theme that is expected to extend into 2018.
Since the 1970s, gold has returned an average 10% per year, comparable to the S&P 500 average price performance. Over the past 10 to 20 years, gold has also held up, supported by important structural changes in the market, like the economic expansion of emerging markets, increased use of gold as part of foreign reserves by central banks and the rising popularity of gold-backed ETFs.
“This ‘stealth rally in gold’ has been enabled by the battered U.S. dollar, says Bespoke Investment Group. The Bloomberg Dollar Spot Index fell in the previous five sessions, its longest losing streak since September,” according to Bloomberg.
Tom Lydon’s clients own shares of GLD.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.