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Gold ETFs to Get Back Their Glitter As Volatility Flares Up?

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After flexing its muscle for most part of this year on the back of safe-haven demand, gold has been on a downhill ride in recent weeks. Overvaluation concerns and a recent spike in the U.S. dollar caused the correction in gold prices past month. Gold bullion ETF SPDR Gold Shares (GLD - Free Report) is up 27.7% this year versus 5.2% gains in the S&P 500. Over the past month, the bullion ETF has lost 4.4% against 1.4% gains in the S&P 500.

However, the brightness appears to be coming back for gold as the metal has added 0.4% past week against 2.6% decline in the S&P 500. There are high chances this safe asset gold will stage a renewed rally in the near term. Let’s tell why.

Why Gold Could Stage a Renewed Rally

Two factors have started to bother Wall Street this September. One is overvaluation in tech stocks (which resulted in profit booking) and the other is the likelihood of a delayed rollout of coronavirus vaccine.The tech-heavy Nasdaq — the real coronavirus winner — got punished more compared with the other indexes in early September. Notably, big tech names ballooned this year amid growing demand for digitization amid social distancing.

Meanwhile, nine drug companies pledged this week that they will not submit vaccine candidates for FDA review until their safety and efficacy is shown in large clinical trials. AstraZeneca, Moderna, Pfizer, Johnson & Johnson, GlaxoSmithKline, Merck, Novavax, BioNTech and Sanofi are some of the companies that have taken the pledge. The move is deemed to alleviate public fears of political pressure to have a vaccine before the November presidential election (read: Sector ETFs to Win or Lose if Blue Wave Sweeps U.S. Election).

On the economic news front, the U.S. economy added 1.371 million jobs in August 2020, decreasing from a downwardly revised 1.734 million in the previous month, and slightly below market forecasts of 1.4 million. Applications for U.S. state unemployment benefits held steady last week, a sign that said extensive job losses are continuing.

Initial jobless claims in regular state programs were unchanged at 884,000 in the week ended Sep 5, Labor Department data showed. The median estimates in a Bloomberg survey of economists indicted 850,000 initial claims in the latest week.

Greenback to Lose Strength?

Gold prices are priced in the U.S. dollar and hence a weaker dollar is beneficial for a gold rally. Strength in the euro in the wake of the European Central Bank’s decision to leave its policy unchanged pressured the U.S. dollar in recent trading. If the safe-haven rally gets stronger in the coming days, the U.S. dollar might lose in comparison to the yen also. This kind of scenario could add to the greenback strength.

Bottom Line

Investors who previously missed the rally in gold ETFs, may now take a closer look at the asset. But any negative news on the global front will make the yellow metal a star again. If global growth slowdown continues, gold prices will have chance to bounce back. And if vaccines get rolled out and health risks subside, gold prices are likely to fall.

So, investors can play gold bullion ETFs like GLD, iShares Gold Trust (IAU - Free Report) , SPDR Gold MiniShares Trust (GLDM - Free Report) , Aberdeen Standard Physical Gold Shares ETF (SGOL - Free Report) and GraniteShares Gold Trust (BAR - Free Report) for the near term.

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