After a blockbuster start to the year, gold lost all its shine, plunging to one-year low. This is especially true against the backdrop of the strengthening dollar and interest rates hike. Notably, the yellow metal is down 10% from its January high, which confirms that the gold market has entered correction territory (read: 5-Year Best January Opening for Gold: ETFs in Focus).
Below, we have discussed various factors that are influencing the safe haven appeal across the board:
Strong Dollar & Rate Hike
The U.S. dollar has enjoyed a strong rebound this year and is currently hovering near a one-year high. Meanwhile, the Fed has raised interest rates twice this year in quarter-point increments and is expected to implement two more lift-offs by the end of the year. Higher rates have diminished the yellow metal’s attractiveness since it does not pay interest like fixed-income assets. The trend is likely to continue this year given the latest Fed testimony, which reaffirmed its plans to gradually increase interest rates.
Powell painted an optimistic view of the economy, citing that America is expanding at a faster pace. Robust job gains, rise in income and optimism among households have lifted consumer spending in recent months and will likely continue doing so. Unemployment rate is below 4% and inflation is running above the Fed’s 2% target for the first time in several years.
Trade War Fears Failed to Entice
Gold is generally viewed as a safe haven in times of economic or political turmoil. But the bullion is currently struggling to garner safe-haven demand despite the ongoing trade war as investors look dollar as a new safety investment amidst the strong economy. However, the escalation of trade disputes could trigger global recession, raising the appeal for gold. Also, trade conflicts could drive up inflation leading to higher demand for gold as an inflation hedge (read: 5 ETF Ways to Trade 6-Year High U.S. Inflation).
Accelerating economic growth, strong corporate earnings and waning demand in the top two consumers, India and China, are also undermining the metal. Further, fresh buying of gold has reduced, resulting in lower physical demand. While demand will likely remain subdued in China given the trade dispute between the world’s two largest economies, India could see a pickup in consumption of the metal in the wedding and festive months ahead.
According to the World Gold Council (WGC), demand will likely to be healthy in the second half of the year on positive but uneven global economic growth, trade war and its impact on currency, rising inflation and an inverted yield curve. As such, the beaten down price of gold offers an attractive opportunity for buying (read: 5 Dividend Growth ETFs to Fight Trade & Inflation Fears).
Should You Buy or Sell?
In such a scenario, many investors might seek to buy gold at a discounted price while some risk aggressive investors want to short gold for the near term. This can be easily done with help of ETFs. Below, we have highlighted them for investors who could directly bet on the gold bullion or take advantage of the quick turn in sentiment with the help of leveraged or inverse ETFs.
These ETFs might be easier plays for investors seeking to deal directly in the futures market.
SPDR Gold Trust ETF (GLD - Free Report) : This is the largest and most-popular ETF in the gold space with AUM of $31.4 billion and average daily volume of around 7.2 million shares. The fund tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. Expense ratio comes in at 0.40%.
iShares Gold Trust (IAU - Free Report) : This ETF offers exposure to the day-to-day movement of the price of gold bullion and is backed by physical gold under the custody of JP Morgan Chase Bank in London. It has AUM of $10.4 billion and trades in solid volume of 13.2 million shares a day on average. The ETF charges 25 bps in annual fees.
SPDR Gold MiniShares Trust (GLDM - Free Report) : This product has newly debuted in the space to reflect the performance of the price of gold bullion. Being a low-cost product with expense ratio of just 0.18%, GLDM has seen huge success, garnering $70.3 million in AUM within a month and trading in good average daily volume of 398,000 shares (read: Inside the Cheapest Gold Bullion ETF).
Leveraged Gold ETFs
Any positive news flow for the metal could provide investors a near-term long opportunity on the commodity according to their risk appetite.
ProShares Ultra Gold ETF (UGL - Free Report) : This fund seeks to deliver twice (2x or 200%) the return of the daily performance of gold bullion. It charges 95 bps in fees a year and has amassed $78.5 million in its asset base. Volume is light at about 44,000 shares per day.
VelocityShares 3x Long Gold ETN (UGLD - Free Report) : This product provides three times (3x or 300%) exposure to the daily performance of the S&P GSCI Gold Index Excess Return plus returns from U.S. T-bills net of fees and expenses. The ETN has been able to manage an asset base of $121.8 million while charging a higher fee of 1.35% annually. However, the note trades in a solid volume of about 780,000 shares a day on average (see: all the Leveraged Commodity ETFs here).
Inverse Gold ETFs
Investors who are bearish on gold may consider a near-term short on the precious metal with the following ETFs depending on their risk appetite.
ProShares UltraShort Gold ETF (GLL - Free Report) : This fund seeks to deliver twice the inverse return of the daily performance of gold bullion. It charges 95 bps in fees a year and has amassed $27.4 million in its asset base. Volume is light at around 26,000 shares per day.
VelocityShares 3x Inverse Gold ETN (DGLD - Free Report)
This product provides three times inverse exposure to the daily performance of the S&P GSCI Gold Index Excess Return plus returns from U.S. T-bills net of fees and expenses. The ETN has AUM of $20 million while charging investors a higher fee of 1.35% annually. The note trades in a moderate volume of around 92,000 shares a day on average.
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