Short-Term Respite For Gold ETFs?
After being crushed in the last three months thanks to a stronger dollar and lower demand, gold saw some respite yesterday on a dovish Fed stance. Gold rallied the most in three months, suggesting strong sentiment in the space, at least for the short term. Gold started off 2015 on a strong note thanks to its safe-haven appeal as doubts over Greece’s fate in the Euro zone and the looming quantitative easing in that debt-ridden region were widespread. However, all returns soon turned into losses as the U.S. economy kept coming up with sturdy data especially on the jobs and housing front which made the case for a sooner-than-expected rate hike stronger. The SPDR Gold Trust ETF (NYSEARCA: GLD ) lost about 6.5% in the last three months while the Market Vectors Gold Miners ETF (NYSEARCA: GDX ) was off about 25%. However, yesterday, GLD added over 1.3% while GDX was up about 2.9%. GDX saw more gains as it often trades as a leveraged play on gold? What Brightens the Yellow Metal? Muted Prospect of September Fed Liftoff: Yesterday’s move was largely the result of speculations of no imminent rate hike decision by the Fed. Minutes from the U.S. Federal Reserve’s July meeting weakened the heightened prospect for Fed rate liftoff in mid September. Some market participants shifted the timeline of a lift-off to December. This in turn weighed on the greenback. The Fed now looks for further stabilization in the labor market and wants to wait for inflation to reach its target. While job data in the U.S. appears strong, apart from the wage gains, low inflation seems to be the real culprit. Inflation is still short of the Fed’s longer-term target due to the free fall in energy prices last year and declining prices of non-energy related imports, per the Fed minute. The Fed expects the price index to remain under pressure in the near term though it will perk up in the medium term. Notably, U.S. consumer prices grew 0.1% in July, down from 0.3% and 0.4% recorded in the prior two months. All these bolstered the appeal for gold. Fight to Safety on China Currency Issue: In early August, Chinese policymakers devalued the country’s currency by 2% against the greenback to boost its waning export profile. Global experts apprehended a currency war in the near future, especially among the Asian export-centric biggies. As s result, yuan devaluation instigated a rout across the global asset classes and spurred a flight to safety for a valid reason. Gold is long viewed as a safe asset and gained an edge over the other assets thanks to this currency issue. Compelling Valuation: Finally, the metal scored higher on a low valuation, compelling investors to trend back into this space, building positions in this otherwise risky metal. GLD is presently trading at a 15% lower level than its 52-week high price prompting many to take advantage of this sudden surge in gold. Bottom Line Having said this, we would like to note that the Fed is due for policy tightening sometime this year. In fact, a group of analysts is still voting for a September lift-off. Inflation will not be barrier for long, and will put pressure on gold yet again. So, this gain seems a short-lived one and will better suit investors with a short-term approach. After all, GLD has a negative weighted alpha of 11.57 , hinting at more pain. Link to the original article here .
