Gold exchange traded products, including the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL), fell 1% last week. That result is not that surprising when considering the Federal Reserve raised interest rates for the second time this year.
Gold has enjoyed greater demand in a low interest-rate environment as the hard asset becomes more attractive to investors compared to yield-bearing assets. However, traders lose interest in gold when rates rise since the bullion does not produce a yield.
Adding to gold’s woes last week, the U.S. dollar rose on the back of the Fed news.
The U.S. Dollar index was among the biggest beneficiaries of the Federal Reserve’s action on interest rates as well as its perceived “hawkish” comments following the interest rate hike. Precious metals prices retreated with Gold futures falling to their lowest levels in nearly 3 weeks. A higher Dollar is generally viewed as bearish for commodity prices with precious metals prices particularly affected by the Fed rate hike as higher interest rates make investing on Gold less attractive as it pays no interest or dividends and actually as a cost of ownership with storage costs,” according to OptionsExpress.
The good news for gold ETFs is that inflation could serve as a catalyst for the yellow metal. Rising inflation could also prove to be a catalyst for gold ETFs. By some metrics, the Fed has under-estimated U.S. inflation, which could prove beneficial to gold because the yellow metal is historically a popular inflation fighter.
Another possible catalyst for gold entering the back of the year is lingering debate surrounding how many times the Fed can raise rates this year (one more is what many traders are betting on) and in 2018 (three seems to be the bet there).
Traders of the Fed Funds futures contract are currently pricing in a nearly 41% probably of one more 25 basis point hike by the end of 2017, although there are several analysts that believe the Fed may not be able to hike rates any further this year unless we start to see economic data improve sharply and we start to see both wage and commodity inflation start to turn upward,” according to OptionsExpress.
For more information on the gold market, visit our gold category.
Tom Lydon’s clients own shares of GLD.