After registering encouraging returns for most part of this year, gold miner ETFs suffered heavily in August on increasing rate hike chances and recent strength in the U.S. dollar. Strong economic data released recently and comments from some of the Fed officials including the Fed chair Janet Yellen escalated the possibilities of a rate hike by the end of this year, which in turn led the greenback to rise against some of the major currencies. Gold futures lost nearly 3.2% in August to $1,311.80.
However, uncertainty still remains in the broader financial markets as indicated by a 7.9% surge in the fear gauge CBOE Volatility Index (VIX) last month. Moreover, the upcoming U.S. Presidential election in November is expected to inject more uncertainties in the days ahead. Some of the concerns including sluggish global growth condition and inconsistent movement in oil prices that led gold miner ETFs to gain from the start of the year are still in play.
Rising Rate Hike Chances, Rising Dollar
Rise in rate hike possibilities by the end of 2016 and a strengthening greenback played a major role in dragging down gold miner ETFs in August. Yellen’s speech at Jackson Hole, along with comments from some of the major Fed officials in recent times raised speculations of a hike by the end of this year. While Yellen said that “an increase in the federal funds rate has strengthened in recent months,” comments from some of the other Fed officials including the central bank’s vice chair Stanley Fisher indicated that a rate hike is in the cards (read:
Is it Time to Invest in Financial ETFs?).
This also led to an increase in the U.S. dollar in recent times. The U.S. Dollar Index (DXY), which seeks to track the performance of dollar against six major currencies, reached its highest level of 96.255 since Aug 9 on Wednesday. Though the index ended the day lower at 96.005, the U.S. dollar rose nearly 0.4% against the Japanese currency to 103.39 yen. Moreover, the euro hit the lowest level of $1.1121 against the U.S. dollar since Aug 10. Meanwhile, Tthe greenback tracking ETF, PowerShares DB US Dollar Bullish ETF
UUP gained 1.4% over the past five sessions (read: 3 Small-Cap ETFs to Buy as Dollar Rallies to 3-Week High). Dismal August for Gold Miner ETFs
As already mentioned, gold miner ETFs suffered heavily last month as rising rate hike chances and strengthening dollar weighed on the price of gold. They lost more than 15% over the past one month period. While the most popular ETF from this space –
VanEck Vectors Gold Miners ETF GDX – declined 17.6% last month, others also followed the same trend.
iShares MSCI Global Gold Miners ( RING Quick Quote RING - Free Report) , Sprott Gold Miners ETF SGDM and PowerShares Global Gold & Precious Metals ETF PSAU lost 19%, 20.5% and 17.2%, respectively, over the past one-month period (read: Reversal Ahead for Gold? ETFs in Focus).
Separately, the largest ETF within the precious metals space – SPDR Gold Shares
GLD, which tracks the spot price of gold bullion, declined 3.4% in August. Also, GLD, which attracted nearly $12.4 billion of assets over the year-to-date frame, saw an outflow of $97.1 million of assets last month, indicating sluggish demand in gold. Factors to Impact Gold Miner ETFs
Despite the massive decline in August, most of the gold miner ETFs mentioned above continued to attract investor attention in August. GDX, RING and SGDM took in $736.2 million, $16.9 million and $17.1 million last month. This indicates that these ETFs are still on investors’ radar, which is likely the result of persisting concerns including weak economic growth in major economies like China and Europe and unpredictable oil price movements.
Though the possibility of a rate hike has risen in recent times, the chances of it happening in September’s policy meeting is still low, which may have a positive impact on gold. Friday’s jobs report will play an important role in setting the course for a rate hike path in the near future. Separately, the U.S. Presidential election, which is scheduled to happen in November, is another important event on which the fate of gold miners will depend. While it is speculated that the Republican candidate Donald Trump’s win may have a positive impact on gold prices, the same will get negatively impacted if Democrat candidate Hillary Clinton wins (read: Fed or Trump:
Who Will Decide the Fate of Gold ETFs?). Is a September Rebound Possible?
In this backdrop, it is speculated that though demand for gold will increase in September but the pace of growth may decline. Demand for jewellery, which represents more than 50% of gold demand, is already weakening in the current high price environment, particularly in China and India.
Moreover, a positive outlook for U.S. economic growth in the third quarter is expected to increase the chances of a rate hike chances in the coming days and strengthen the dollar, which in turn may have a negative impact on gold prices. Hence, the course of gold miner ETFs in September will largely depend on the timing of the rate hike. Moreover, the global growth scenario amid easing of monetary policies in major economies and other factors such as demand-supply in the crude market will also have a significant impact on gold miner ETFs this month.
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