After starting 2018 on the upside, the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and other gold ETFs have recently retreated as the dollar gained momentum.
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. Recently gold’s hedging capabilities have disappointed.
“Even during equity market sell-offs, gold has been a less reliable hedge. For example, during the May 29th sell-off on the back of turmoil in the Italian bond market stocks got pounded; gold was flat,” according to BlackRock.
Dollar Dilemma for Gold
The strengthening U.S. economy is translating to a stronger dollar, which is often a problem for gold. Gold, like other commodities, is denominated in dollars, meaning it has an inverse relationship to the U.S. currency.
“In particular, the stronger dollar has been a headwind for gold. While the dollar declined in December and January, its recent strength has removed one of the key props for the yellow metal,” said BlackRock.
Some gold market observers believe the yellow can firm up and trend higher next year as the dollar retreats. At least one gold bull believes bullion could return to $1,400 for the first time since 2013.
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Still, euro weakness, which likely boosts the dollar, is a near-term issue for gold and the related exchange traded products to contend with.
“For the first time in years, investors are beginning to question the long-term sustainability of the euro. These fears are probably overblown, but there is no quick cure for the current instability in Italian politics. These concerns are likely to linger, at least through the next Italian election,” notes BlackRock.
On a global basis, gold ETFs added assets in May, the third consecutive month of inflows for the funds.
For more information on the gold market, visit our gold category.
Tom Lydon’s clients own shares of GLD.