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Can Gold ETFs Gain in 2021 After Two Positive Years?
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After flexing its muscle for two years back to back on safe-haven demand, gold is likely to log a positive year in 2021 also. Gold bullion ETF SPDR Gold Shares (GLD - Free Report) was up 17.6% in 2019 and 24.4% in 2020. So far this year, the bullion ETF has lost 4.3% against 4.8% gains in the S&P 500. While the start of the year hasn’t been great, the end could leave the yellow metal in the green if some factors hold good. Let’s delve a little deeper.
Dovish Central Banks
The Fed has been acting super-dovish since March 2020. It has a zero-rate policy and a bond-buying program in place. Fed chair Powell indicated that rates will remain lower for a while due to a lackluster job picture.
Along with the Fed, several other central banks have also resorted to a super-easy monetary policy. This should boost inflation in the coming days. If inflation picks up at any point of time, that would be great for gold investing as the yellow metal is often viewed as a hedge against inflation.
Greenback to Lose Strength?
Gold prices are priced in the U.S. dollar and hence a weaker dollar is beneficial for a gold rally. “Global growth should be very strong over the next six months as the vaccination campaigns play out," Goldman Sachs Group Inc. strategists including Zach Pandl and Kamakshya Trivedi wrote in a note. “We expect global cyclical forces to dominate some degree of ‘U.S. outperformance’, resulting in dollar downside for most crosses,"as quoted on Bloombergquint.
Strength in the euro despite the European Central Bank’s decision to leave its policy unchanged pressured the U.S. dollar in recent trading. The allure for yen and Chinese yuan has also been rising. This kind of scenario could keep the greenback a little subdued and benefit gold.
Overvaluation Concerns in Markets
The S&P 500 is now 75% higher than its low last March. The Nasdaq has more than doubled since then. Although there are reasons for such a rally as vaccine distribution boosted the faster-than-expected recovery, the bubble fear is also brewing. Goldman Sachs expects the S&P 500 to jump to 4,300 by the year end, up about 11% from the current levels. However, if the market crashes on profit booking or overvaluation concerns, gold will see some opportune moments.
ETFs in Focus
Against this backdrop, investors can keep track of regular gold ETFs like GLD, iShares Gold Trust (IAU - Free Report) , Aberdeen Standard Physical Swiss Gold Shares ETF (SGOL - Free Report) and SPDR Gold MiniShares Trust (GLDM - Free Report) , and leveraged ETFs like DB Gold Double Long ETN (DGP - Free Report) and ProShares Ultra Gold (UGL - Free Report) (see all precious metals ETFs here).
And if the above-mentioned factors do not fall in place, then one can bet on the inverse gold product ProShares UltraShort Gold (GLL - Free Report) and make some quick gains.
Bottom Line
Having said this, we would like to note that current scenario is not in favor of gold investing as the greenback is gaining strength and stock market is rallying. However, it is just the start of the year. Gold investors should closely watch the economic and market events before taking any decisions.
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Can Gold ETFs Gain in 2021 After Two Positive Years?
After flexing its muscle for two years back to back on safe-haven demand, gold is likely to log a positive year in 2021 also. Gold bullion ETF SPDR Gold Shares (GLD - Free Report) was up 17.6% in 2019 and 24.4% in 2020. So far this year, the bullion ETF has lost 4.3% against 4.8% gains in the S&P 500. While the start of the year hasn’t been great, the end could leave the yellow metal in the green if some factors hold good. Let’s delve a little deeper.
Dovish Central Banks
The Fed has been acting super-dovish since March 2020. It has a zero-rate policy and a bond-buying program in place. Fed chair Powell indicated that rates will remain lower for a while due to a lackluster job picture.
Along with the Fed, several other central banks have also resorted to a super-easy monetary policy. This should boost inflation in the coming days. If inflation picks up at any point of time, that would be great for gold investing as the yellow metal is often viewed as a hedge against inflation.
Greenback to Lose Strength?
Gold prices are priced in the U.S. dollar and hence a weaker dollar is beneficial for a gold rally. “Global growth should be very strong over the next six months as the vaccination campaigns play out," Goldman Sachs Group Inc. strategists including Zach Pandl and Kamakshya Trivedi wrote in a note. “We expect global cyclical forces to dominate some degree of ‘U.S. outperformance’, resulting in dollar downside for most crosses,"as quoted on Bloombergquint.
Strength in the euro despite the European Central Bank’s decision to leave its policy unchanged pressured the U.S. dollar in recent trading. The allure for yen and Chinese yuan has also been rising. This kind of scenario could keep the greenback a little subdued and benefit gold.
Overvaluation Concerns in Markets
The S&P 500 is now 75% higher than its low last March. The Nasdaq has more than doubled since then. Although there are reasons for such a rally as vaccine distribution boosted the faster-than-expected recovery, the bubble fear is also brewing. Goldman Sachs expects the S&P 500 to jump to 4,300 by the year end, up about 11% from the current levels. However, if the market crashes on profit booking or overvaluation concerns, gold will see some opportune moments.
ETFs in Focus
Against this backdrop, investors can keep track of regular gold ETFs like GLD, iShares Gold Trust (IAU - Free Report) , Aberdeen Standard Physical Swiss Gold Shares ETF (SGOL - Free Report) and SPDR Gold MiniShares Trust (GLDM - Free Report) , and leveraged ETFs like DB Gold Double Long ETN (DGP - Free Report) and ProShares Ultra Gold (UGL - Free Report) (see all precious metals ETFs here).
And if the above-mentioned factors do not fall in place, then one can bet on the inverse gold product ProShares UltraShort Gold (GLL - Free Report) and make some quick gains.
Bottom Line
Having said this, we would like to note that current scenario is not in favor of gold investing as the greenback is gaining strength and stock market is rallying. However, it is just the start of the year. Gold investors should closely watch the economic and market events before taking any decisions.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>