Gold ETFs have had a roller coaster ride so far in 2017. The largest gold ETF SPDR Gold Shares GLD has gained about 5.9% in the year-to-date frame (as of July 4, 2017), while the fund shed about 3% in the last three months. In fact, gold logged its first monthly drop of this year in June.
The latest patch of dismal performance can be attributed to rising rate worries. The Fed has hiked interest rates twice this year and may go for another hike by the end of 2017. Ideally, this should boost the greenback and hurt the metal’s investing.
Also, global markets remained steady and lured away more investors to equities from gold. If this was not enough, parts of Donald Trump’s agenda, including his travel ban, have been approved lately. This has spurred investors’ confidence in the future of the much-awaited tax reform and an upbeat equity market. This in turn has hurt gold investing (read: Forget Gold, Palladium ETF is Shining the Brightest).
However, the downing trend may change in the second half of 2017. We’ll tell you why.
Safe Haven Demand
The wind beneath the wings could be a rise in safe-haven demand in the wake of heightened volatility in the global market. The third quarter of 2017 started with concerns including North Korea’s intercontinental missile launch and the possibility of a referendum in France if the key institutional reforms are not quickly approved by the parliament.
Since gold is viewed as a hedge against market turmoil, its prices recoiled from seven-week lows on July 4 following North Korea’s missile launch. If political risks take the upper hand in the balance of the year, be it related to Trump’s policy uncertainty or Europe’s election uncertainty, gold ETFs may gain strength. GLD was up about 0.4% on July 5 (read: Gold ETFs Tussle Between Geopolitics and Fed).
If Trump Rally Stalls
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 be transformed into reality given the increasing political disagreement.
If economic measures taken by Trump fall short of expectations, there could be a marked correction in stocks. Volatility levels might flare up, opening up scope for a gold rush. Wells Fargo Investment Institute senior global equity strategist has already indicated that the rally in the S&P 500 may slow down in the second half of the year.
UBS Group AG’s wealth management unit noted that gold may “trade in a range of $1,200 to $1,300 an ounce in the short-term.” UBS believes that “the pickup in nominal rates will be equally matched by the pickup in inflation.” Decent demand this year and weaker output, and a still-subdued dollar may bode well for the metal. As per State Street Global Advisors, gold may swing from $1,150 to $1,350 in the second half, depending on global economic conditions.
Will India’s GST Rollout Boost Illegal Sales?
India is one of the key gold consumers. The country launched GST (goods and services tax) on July 1 in order to fill in for/unite more than a dozen of indirect taxes levied by state and central governments. Under the GST norm, taxes on gold increased to 3% from 1.2% previously.
The move may boost illegal transactions in the black market, as per an article published on Reuters. A hike in import duties to 10% in 2013 has already increased gold smuggling in India. As per Reuters, the World Gold Council estimates that 120 tons of gold was smuggled into India in 2016. Now GST could trigger both smuggling and illegal sales. If this happens, the overall demand picture should not be that hurt due to higher taxes (read: India to Unify Tax: Near-Term Pain/Long-Term Gain for ETFs).
ETFs in Focus
Investors having faith in the above-said fundamentals, may play ETRACS CMCI Gold Total Return ETN , GLD, ETFS Physical Swiss Gold Shares ETF SGOL and Van Eck Merk Gold Trust ETF OUNZ.
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