Gold Rally Fades: Buy ETFs On The Dip Or Short?
Zacks Investment Research | May 23, 2016 11:44PM ET
Fed Hike Bets Dull Gold
When market watchers were almost sure about a delayed policy tightening in the wake of the threats to the stability of the U.S. economy, the latest Fed minutes hinted at the possibility of a June hike. This is because the U.S. economy came up with some stellar economic readings for the month of April and the global market upheaval eased a bit. Oil prices also hit a six-month high, signaling stabilization in global market investing.
Needless to say, speculation of a sooner-than-expected Fed hike boosted the so-far-struggling greenback and the optimism around gold investing, which bears no interest, started to drain. In fact, gold logged ‘the longest slump in more than two months’ recently on a stronger U.S. dollar. Gold now hovers around $1,246/ oz (as of May 23, 2016).
The Fed enacted a rate hike in December and two more rate hikes are due this year if everything goes well. Chances of a June rate hike jumped to 30% from 4% a week ago, as per Fed fund futures data.
Rising rate concerns always go against gold as evident from the previous returns of the largest gold bullion ETF SPDR Gold Shares (NYSE:GLD) (How Well will Gold Mining ETFs Weather a Rate Hike? ).
Higher Inflation = Fed Hikes = Higher Demand for Gold
Gold is often viewed as a hedge against inflation. Now with oil prices shoring up and several economies on the mend, global inflation should pick up. This is especially true for the U.S. economy. One of the pre-requisites of the Fed hike is higher inflation. So, if the Fed makes a move, there must be some noticeable uptick in inflation, which in turn is likely to boost demand for inflation-protected assets like gold.
Demand Exceeds Supply: Gold demand grew 21% year over year in the first quarter of 2016, representing $1,199 per ounce (down about 3.8% from the current level) and by 3% for 2017 to $1,251. The bank expects prices to go up to above $1,400 in 2019.
How to Profit via ETFs?
From the above discussion, we can say that gold prices will fall in the short term due to a surge in profit booking amid renewed Fed hike concerns. If this happens, investors can play the slump in gold via inverse ETFs like DB Gold Double Short ETN (Short Gold with These ETFs ).
Get The News You Want
Investors can also play AdvisorShares Gartman Gold/Euro ETF ( ) lost about 1.1% in the last five trading days (as of May 23, 2016).
However, investors can play gold bullion ETFs like GLD and IAU , if things turn in favor of gold in the medium term. But chances of this are slim at the current level. Only inflationary pressure, a sudden global market crisis and a slow Fed could take gold higher.
Zacks Investment Research
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.