Market uncertainty sends gold ETFs soaring

Jun 28th, 2019 | By | Category: Commodities

Gold-linked ETFs are benefitting from an upturn in the gold price of 9.4% over the past month (as of 26 June 2019). Gold is now trading around $1,410/oz, significantly above its previous five-year high.

Dovish Fed & market uncertainty send gold ETFs soaring

Gold has soared 9.4% over the past month and is now trading at $1,410/oz, significantly above its previous five-year high.

Gold ETFs right across the AUM spectrum are enjoying a boost, from the giant $36 billion SPDR Gold Shares (GLD US) and $13bn iShares Gold Trust (IAU US) products, to the smaller and cheaper $500 million GraniteShares Gold Trust (BAR US) and $900m Aberdeen Standard Physical Swiss Gold Shares ETF (SGOL US).

According to gold analysts, the rally is a result of dovish rhetoric from the US Federal Reserve, concerns over a slowdown in US and global economic growth, and rising geopolitical tensions.

Nitesh Shah, Director of Research at WisdomTree, commented, “After falling between February and May 2019, gold has recently seen a new lease of life. With the Federal Reserve reversing policy course – indicating it is likely to cut rates next year rather than hike as its previous ‘dot-plots’ implied – Treasury yields have declined and the US dollar has weakened. That has been a boon for gold prices.

“Furthermore, geopolitical issues are being acknowledged by the market. There has been little visible progress in resolving the trade dispute between the US and China in the past month and doubts still remain as to whether the Presidents of both countries can unjam the stalemate when they meet at the G20 meeting in Osaka on 28/29th June.

“The risk of military confrontation in the Middle East is rising as Iran is on the brink of breaching the terms under the Joint Comprehensive Plan of Action. Attacks on oil vessels (where blame has been attributed to Iran) and the downing of a US drone, which Iran’s Revolutionary Guard claimed responsibility for, clearly highlight the potential for military escalation. Gold tends to be a port of call in times of geopolitical tension.”

Gold forecast

WisdomTree, which has seen over $2bn flow into its gold products this year, including the $7.2bn ETFS Physical Gold (PHAU LN), notes that the gold price surpassing and staying above the resistance level of $1400/oz is an important milestone. The firm believes this indicates gold could go even higher and has forecast a gold price of $1480/oz by the end of Q2 2020.

This forecast is in line with research carried out by Invesco which has also seen major inflows into its gold product – the $6.4bn Invesco Physical Gold ETC (SGLD LN). Invesco carried out a survey of professional investors globally and found that nearly three-quarters (72%) predict the price of gold will rise by the end of the year. Of those that anticipated an increase, the forecast value was $1,485/oz.

When asked what the primary reasons would be for the rise in gold prices, the most popular responses were increasing trade conflicts between the US and China (cited by 71% of respondents), economic downturn in the US and/or Europe (60%), sustained downturn in major stock market indices (46%) and central banks holding or cutting interest rates (37%).

VanEck, known for its blockbuster gold mining equity ETFs, also sees further potential upside in the gold price. Joe Foster, Portfolio Manager, and Strategist at VanEck said “The shift in central bank policies denotes a change in the macroeconomic environment that brings new levels of risk to the financial system. Central banks see a downturn coming. However, many investors believe they have limited ability to fight a recession with US interest rates already at 2% and European interest rates below 0%. In addition, quantitative easing has lost its efficacy. Layer on global trade and geopolitical tensions, and it is not hard to imagine a “flight to safety” that moves gold much higher.

“The US stock market’s blind faith in the Fed’s policies is pushing the market back to its highs. This makes the market vulnerable to weak economic news or any signs that indicate the Fed is unable to curtail a downturn. We believe any stock market selloffs should further propel gold as investors move away from risk.”

Gold stocks

Gold mining ETFs are truly breaking out, leading the global ETF league table over the past month. The VanEck Vectors Gold Miners ETF (GDX US) and VanEck Vectors Junior Gold Miners ETF (GDXJ US) are each up around 24%, as of 26 June 2019.

VanEck notes that a previous lack of interest in gold mining equities due to the range-bound gold market of the past six years has led gold stocks to low valuations and many mid-tier and junior stocks to deep discounts to fair value.

Foster added, “If we are correct in calling for a stronger gold market, we expect the equities to significantly outperform bullion. Gold companies carry earnings leverage to rising gold prices that should receive an additional value boost as positive sentiment returns to the sector.”

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