Back to top

Image: Bigstock

Reversal Ahead for Gold? ETFs in Focus

Read MoreHide Full Article

By now, the dazzle in gold this year is known to all. A rush to seek safety for the most part of 1H16 triggered by global growth issues and a major event like Brexit at the end of the second quarter bolstered demand for this safe haven metal, after three muted years.

Gold bullion ETF SPDR Gold Shares GLD is up over 27% so far this year (as of August 18, 2016). However, things have become a little uncertain for the yellow metal lately (read: Want to Dig Into Mining ETFs with 100% YTD Gains Seen Already?).

On the one hand, strong July job data and New York Fed president William Dudley’s gave hints that the “possible” September hike may go against the metal. On the other hand, a few unimpressive U.S. economic readings including July retail data, productivity and wholesale prices clear the path of the metal’s rise as these mean lower chances of a near-term Fed hike.

William Dudley expects “growth in the second half of the year that'll be stronger than the first half — so some acceleration in the growth outlook." In fact, he is optimistic about the economy attaining the 2% inflation goal going forward. All these talks may lead to speculation of a sooner-than-expected Fed rate hike, which has the potential to boost the greenback and weigh on gold as the metal is linked to the U.S. dollar. 

Is Gold a Sell Even if Fed Doesn’t Hike?

Having talked about gold’s bull story, the question arises if the yellow metal is overvalued now. At least, billionaire investors George Soros’ portfolio gives such cues. In the second quarter, Soros Fund Management offloaded the “majority of his shares in the gold miner and his full stake in mining company Silver Wheaton, according to regulatory filings.”

As of June 30, Soros Fund Management had 240,000 shares of GLD, down from 1.05 million shares as of March 31. Soros also reduced his holdings in Barrick Gold to 1.07 million shares from 19.4 million shares, as per, after capitalizing on Barrick's record first-half rally.

Barry Rosenstein’s Jana Partners also resorted to the same route by cutting its stake in GLD, going by the article published in Investors should also note that GLD added about 1.5% in the last one month (as of August 18, 2016) – not an outstanding performance.

There are analysts who believe that this mad rush in gold will eventually lose pace and that gold will return to $1,200–$1,250 by the end of the year. Notably, gold is trading at the $1,350 level currently (read: Forget Gold, Buy Silver ETFs Instead).

Though GLD amassed as much as $12.2 billion in assets in the first half of 2016, the fund shed about $645.9 million in the week ended August 17, 2016, indicating a trend reversal. Investors probably started to think that after such a stellar run, gold has become overvalued.

Not Very Impressive Demand Profile?

Though demand for ETFs is driving up gold, the June quarter was one of the worst for Indian gold demand and imports. Jewelry buying plunged 56% year over year in India in Q2, as per GFMS data (read: Are ETFs Driving Up Gold Prices?).

China’s jewelry industry also witnessed “its worst second quarter performance since 2009, with demand contracting 31%” year over year. There was also a significant decline in bar and coin buying in China.

Other Metals on a Tear

Another fact that may steer investors away from gold is the stronger potential in other metals. Other precious metals including silver, palladium and platinum joined the party later on. Plus, unlike gold, other metals like silver, palladium and platinum are likely to perform well if the economy picks up.

This is because silver has increased usage in manufacturing activity while the automobile industry alone is responsible for about 40% of the world's platinum demand. Palladium is also highly used in the auto sector (read: Palladium & Platinum ETFs on a Tear: Will the Surge Continue?).

Gold ETFs in Focus

Investors may thus keep a watch on gold ETFs like GLD, iShares Gold Trust ETF IAU, ETRACS CMCI Gold Total Return ETN UBGVan Eck Merk Gold Trust ETF OUNZETFS Physical Swiss Gold Shares ETF SGOL and PowerShares DB Gold Fund DGL. These funds may come under pressure in the coming days if investors start to dump gold.

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 >>

Published in