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Are Gold ETFs Set to Shine Again?

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Gold investing may not have been lucrative over the past few days, thanks to Fed rate hike talks and strengthening of the greenback, but investors possibly should not lose heart just yet (read: Profit Out of Bleeding Gold Mining ETFs).

The yellow metal has had an amazing journey so far this year on a flight to safety amid global growth concerns and Brexit vote at June end. In fact, gold price saw the best first half (+25%) in about four decades.

Even after losing about 4.9% in the last one month (as of October 13, 2016), the largest gold bullion ETF SPDR Gold Shares ETF (GLD - Free Report) is up over 18% this year. At present, the metal is hovering around the $1,250 level, but could ricochet to lofty levels again in the days ahead. Note that despite the recent price slump, investors poured about $454.7 million in GLD during October 6–12 (read: Prepare for a Trump Presidency With These Stocks & ETFs).

Let’s find out the factors that could trigger a rally in gold again.

Slower Fed Rate Hike Trajectory

Chances of a rate hike before December’s policy meeting are dim as the Fed is unlikely to tighten polices in its November meeting, which is just ahead of the presidential elections. Even if the Fed hikes rates in the near term led by the near-full employment job data, it possibly would not be more than 25 bps, which looks pretty endurable for gold.

Though there might be a short-term setback, this kind of a slow rate hike trajectory will likely keep the greenback from shooting higher and benefit gold investing (read: Fed or Trump: Who Will Decide the Fate of Gold ETFs?).

As per UBS, gold may decline to as low as $1,225 an ounce over the next three months but is poised for a grand return six to 12 months from now.

Will U.S. Stocks Nosedive Ahead?

Echoing the tone of Goldman and several others, HSBC technician now warns about the “the possibility of a severe fall in the stock market.” Still-tepid economic growth, still-weak corporate earnings, lack of persuasion in the market rally, likely Fed rate hike and Brexit may cause market upheaval in the coming days. And as we know gold normally shares an inverse relation with the market, this could come across as a winning moment for gold ETFs (read: Believe in George Soros? Short S&P 500 with These ETFs).

Slowing Global Growth

Prolonged global growth concerns raise possibilities of a gold rush. First, edgy investors look for safety in such a wavering investment backdrop and second, central banks normally resort to accommodative policies to boost economic growth.

Note that, International Monetary Fund (IMF) lately lowered the world output growth projection to 3.1% this year from 3.2% last year. However, economies are likely to gather steam next year and log 3.4% growth (read: 5 ETFs to Bank on as Global Growth Concerns Loom).

More interestingly, the U.S. witnessed a considerable reduction in growth projections from 2.2% to 1.6%, due to low business investments. Japan’s growth is estimated at just 0.5% for 2016 and at 0.6% for 2017. The U.K. economy is predicated to see 1.8% growth this year, down from 2.2% in 2015. Such mired economic projections are likely to favor gold investing.

Inflation: Another Friend

Although the inflationary backdrop remains bleak in the U.S., consumer prices rose 1.1% year over year in August 2016, higher than 0.8% in July and market forecasts of a 1% increase. Recently, New York Fed President Bill Dudley indicated that U.S. inflation expectations appear to be "well-anchored.”

Even if inflation gains further with a recovery in energy prices, it may act as a catalyst for gold. Gold is often viewed as a hedge against inflation. One of the pre-requisites of the Fed hike is a decent level of inflation. So, if the Fed makes any move going forward, there has to be some noticeable uptick in inflation, which in turn is likely to boost demand for inflation-protected assets like gold.

Ebbing Overvaluation

The recent dip in prices also steers clear of overvaluation concerns in gold, giving it a fresh lease of life. The relative strength index for GLD is presently 28.77, indicating that the fund is approaching the oversold territory and might see a strong reversal in the medium term.

Festive Season in India

Retail demand in the two top gold consuming countries China and India often drive the metal’s prices. With the forthcoming wedding and festival season in India, gold prices will have another reason to run.

Dhanteras, the first day of the famous Indian festival Diwali, is on October 28 this year. The occasion is marked by huge gold purchases. Also, the recent drop in the metal’s prices will give buyers more reasons to buy gold this year.

Why Some Miners Are Bullish

Peru-based Buenaventura recently indicated that “bullion prices are supported on the physical side by environmental and social restrictions to supply and strong demand led by India and China, and on the financial side by the U.S.’s limited scope to increase interest rates.” The company expects the prices to rise in the long run.

Particularly, the Environmental Protection Agency (EPA) has lately been resorting to stricter rules to preserve a healthy environment and seeks to curb the development of mines in controversial locations, which in turn is likely to dent supplies.

ETFs in Focus

So, investors pining hopes on a rebound in gold may tap the likes of iShares Gold Trust IAU, PowerShares DB Gold ETF DGL and VanEck Merk Gold Trust OUNZ along with GLD (see all Precious Metals ETFs here).

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