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What Lies Ahead for Precious Metal ETFs?

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Precious metal ETFs have been in the spotlight of late. Rising geopolitical risks and trade war fears have increased the appeal of some of these funds as safe-haven investments. While leasing of palladium has led to a fall in favor of palladium-focused funds, strong fundamentals have driven demand for platinum.

Factors Driving Prices

Gold and Silver

The Federal Reserve hiked interest rates by 25 basis points in Powell’s first meeting as chairman. The new benchmark funds rate was increased to 1.5% to 1.75% in March. Per the CME Fed watch tool, two more hikes are expected in 2018.

However, geopolitical risks have been on the rise. The latest chemical attack on Syria has led to increased tensions between Russia and the rest of the world, as major leaders accuse Russia of supporting the Syrian president Bashar al-Assad’s actions. Moreover, trade war fears have increased the appeal of safe-haven investing (read: Safe Haven ETFs to Buy Amid Extended Selloff).

After announcing tariffs on around $50 billion worth of goods from China, President Trump has threatened to impose further tariffs on goods valued at around $100 billion. Beijing has threatened to retaliate, although Trump expects negotiations to calm the markets.

Moreover, silver prices have been volatile in the past year owing to relatively lesser demand and rising geopolitical uncertainty. However, multiple analysts expect silver to stage a comeback. “We expect silver to move moderately higher in 2018 and 2019 based on strong industrial demand and limited supply,” per a Kitco article citing James Steel, chief precious metals analyst at HSBC.

Palladium and Platinum

The auto industry generates maximum demand for these two metals. Platinum is more widely used in diesel vehicles, which has fallen out of favor lately, owing to the 2015 Volkswagen emission scandal.

However, optimists expect an uptick in industrial and jewelry demand for the metal. Moreover, after the ousting of South African president Jacob Zuma, new president Cyril Ramaphosa has taken steps to make investing in the country attractive. Extensive reforms and foreign investments might lead to an appreciation of the rand.

Being the largest producer of platinum, an appreciation of the South African currency and lower greenback-denominated platinum prices might put pressure on production. The resulting demand supply imbalance may lead to a hike in the price of platinum.

Coming to palladium, ETF holdings in the precious metal have been slipping to record lows, as owning the asset gains favor. The primary reason for the loss in favor of ETFs is that leasing out palladium has emerged as an attractive investment opportunity. Per a Bloomberg article, borrowers are paying palladium holders 6% to use the metal for a week, as compared with paying to gain exposure to the metal via ETFs.

Let us now discuss a few ETFs focused on providing exposure to the space (see all Precious Metals ETFs here).

SPDR Gold Shares ETF (GLD - Free Report)

This fund offers physical exposure to gold. It seeks to track the performance of the gold bullion and might turn out to be a cost-efficient way of gaining exposure to the commodity even after accounting for the fund’s expenses.

It has AUM of $36.5 billion and charges a fee of 40 basis points a year. It has returned 2.6% year to date and 6.2% in a year. As such, GLD carries a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

iShares Silver Trust (SLV - Free Report)

This is one of the most popular funds in the space offering exposure to the metal.

The fund has AUM of $5.2 billion and charges a fee of 50 basis points a year. It has lost 2.7% year to date and 8.6% in a year. As such, SLV carries a Zacks ETF Rank #3 with a High risk outlook.

ETFS Physical Palladium Shares (PALL - Free Report)

This is one of the most popular funds in the space offering exposure to the metal.

The fund has AUM of $199.6 million and charges a fee of 60 basis points a year. It has lost 12.8% year to date but returned 15.7% in a year. As such, PALL carries a Zacks ETF Rank #3 with a High risk outlook.

ETFS Physical Platinum Shares ETF (PPLT - Free Report)

This fund is designed to track the spot price of the platinum bullion. It is the only pure play investors can get on the metal, beyond buying shares of platinum miners or buying futures contracts.

The fund has AUM of $515.8 million and charges 60 basis points as fees per year. It has returned 0.4% year to date but lost 2.8% in a year. As such, PPLT carries a Zacks ETF Rank #3 with a Medium risk outlook.

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