Gold prices have fallen for the last six months on the trot, marking the longest streak of losses in nearly three decades. This is because rising rate concerns in the United States have given a boost to the greenback. Invesco DB US Dollar Bullish (UUP - Free Report) is up about 6.2% this year (as of Oct 9, 2018). Since gold prices act inversely to the U.S. dollar, gold bullion ETF SPDR Gold Shares (GLD - Free Report) has lost about 10% this year (as of Oct 9, 2018).
A robust U.S. stock market also made investors stay away from gold investing. Inflows into gold-backed exchange-traded funds (ETFs) were slower in the second quarter of 2018, causing the lowest H1 demand since 2009. However, the plunge in prices have possibly bottomed out, per a few analysts (read: Q3 ETF Asset Flow Roundup: What's Hot & What's Not).
Why Prices Were Bottomed Out and Could Rally Soon?
Uptick in Central Bank’s Purchases
Lower gold prices have resulted in an uptick in global central-bank purchases of gold, per MarketWatch. Net gold purchases by central banks in the first half were 8% higher year over year led by Russia, Kazakhstan and Turkey.
The Reserve Bank of India (RBI) also bought 8.46 metric tons of gold to its stock of holdings during the financial year 2017-18 ending June 30, for the first time in nearly a decade. It is an important move in the gold market as RBI normally does not trade in gold like many other central banks, per the source.
M&A in the Mining Sector
Another reason that may indicate the likely bottom in the gold prices is “the recent consolidationin the metals mining sector,” which can define a turnaround in the industry. In the current low-price environment, several smaller companies are getting merged to survive.
President and CEO of Great Panther Silver (GPL - Free Report) thinks that investors are seeing “the start to more mergers within the mining space as companies are beginning to take advantage of low valuations in the marketplace,” per an article published on kitco.com. He expects more M&A in the mining sector.
A Correction in U.S. Equity Likely Next Year?
The U.S. central bank has upped interest rates thrice this year and expects to enact one more in December. The U.S. central bank eyes three more hikes next year and one in 2020.If this happens, volatility in the stock market is likely to come and gold prices may go higher (read: Fed Hikes Rates as Expected: ETF Areas That Gained).
Upbeat Analysts’ View
Per Bank of Taiwan (BOT), though gold prices are currently suffering, prices are likely to rebound in the middle of next year. ABN AMRO also believes that precious metals markets have bottomed. The bank expects gold prices rising to $1,250 an ounce by the end of the year and touching $1,400 an ounce by the end of 2019.
Benchmark U.S.-Treasury yield is hovering around the seven-year high level. ABN AMRO believes that the “10-year U.S. treasury yield will likely peak around current levels and that US economic growth will peak this quarter.” So, no more threat from the U.S. treasury yield is likely (read: Treasury Yields at New 7-Year High: ETF Strategies to Play).
Gold: Inflation-Protected Asset
Gold is commonly viewed as an inflation-protected asset. An increase in inflation which is noticed globally can favor gold investing. Also, amid trade war higher tariffs could result in an increase in raw material cost for manufacturers that use these metals. Manufacturers might try to pass on a certain portion of higher material prices to consumers. This in turn will add to inflationary pressure.
ETFs in Focus
Against this backdrop, investors can keep track of gold ETFs like GLD, iShares Gold Trust (IAU - Free Report) , ETFS Physical Swiss Gold Shares (SGOL - Free Report) , GraniteShares Gold Trust (BAR - Free Report) and SPDR Gold MiniShares Trust (GLDM - Free Report) .
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