Back to top

Image: Bigstock

Are Gold ETFs Gearing Up for a Rally?

Read MoreHide Full Article

Gold prices are back on a rallying mode following the Fed’s dovish guidance over the course of policy tightening. The Fed raised the benchmark interest rates by a modest 25 bps to 0.75–1% in the March meeting and forecast three rate hikes for 2017 like it did last December (read: See How ETFs React When Hawks Act Like Doves).

Fed’s Dovish Outlook

Given the prospect of a faster economic recovery and Trump’s promise of fiscal reflation, this guidance came as accommodative to the investing world. As a result, gold which nosedived before the rate hike and the Fed statements, again raised its head. The precious metal touched a two-week high on March 20 as the greenback dropped to a six-week low on the Fed's dovish outlook (read: Time to Buy Gold ETFs on the Dip?).

Negative Interest Rates

With three rate hikes this year and in the next, the real interest rates in the U.S. are likely to be in the deep negative territory, as per some analysts. If this is not enough, most central banks across the world including Bank of Japan, the Swiss central bank or the ECB are pursuing negative interest rates to promote growth. This in turn would be favorable for non-interest bearing assets like gold. 

Inflation: A Friend

The inflationary outlook is finally looking up in the developed economies, albeit slowly. Prolonged easy money policies from global central banks, the OPEC move to stabilize oil prices and the Trump effect made it happen. Gold is often viewed as a hedge against inflation. Having said that, as of now, the global inflation level is not that steep to give a material boost to gold prices.

Geopolitical Risks

Investors should also note that though the price of the yellow metal has steadied with the possibility of a gradual rate hike trajectory, political risks in Europe including Brexit worries, French elections and talks of Scotland’s independence vote have brightened the prospects of the metal. These issues would help the safe-haven asset gold (read: Outlook for French ETFs Ahead of First Presidential Debate).

If the Trump Rally Hits the Brakes

So far, the U.S. market rally has been propelled by Trump’s pledges for fiscal reflation. However, it is to be seen how many of the vows will translate into reality. The market did not jump in joy following the budget blueprint. If economic measures taken by Trump take time to materialize, there could be a correction in stocks. Volatility levels might flare up, opening up scope for a gold rush (read: Trump Unveils First Budget Blueprint: ETFs to Gain or Lose).

Analysts’ Bullish View

Some analysts believe that gold will rise to US$1300/oz by midyear from the current level of $1227/oz, though the metal is expected to fall back at the end of the year. However, while Morgan Stanley is bullish on precious metals, Societe Generale SA expects less hiccups on the political front and thus sees no rally for gold. It believes that further policy tightening would hurt the rally.

Bottom Line

As of now, the metal seems due for a rally, though the run may not be long enough. So, investors intending to profit out of the new-found optimism in the gold space may consider gold ETFs like SPDR Gold Shares GLD, iShares Gold Trust IAU andETFS Physical Swiss Gold SGOL.

For fatter returns, investors can also play leveraged products like VelocityShares 3x Long Gold ETN , DB Gold Double Long ETN DGP and ProShares Ultra Gold UGL. However, leveraged ETF plays involve greater risks.

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