Wednesday was a less than inspiring trading session for the major players in the gold ETF market, as exchange-traded funds like the iShares Gold Trust (IAU) and its larger counterpart, the SPDR Gold Shares (GLD) each sank about 2%. The same could be said for the next-largest gold ETF, the ETFS Swiss Physical Shares (SGOL), which also lost nearly 2%. This more than erased the previous day’s gains in the wake of the terrifying ISIS attack at an airport in Brussels, Belgium.
Signals from the Fed
Even as the U.S. stock markets traded in negative territory on Wednesday, gold prices slumped to their lowest in a month. Thus, share prices for the various gold ETFs tumbled right along with spot gold, which coughed up more than $20 per ounce. Similar action was seen in silver, which shed a staggering 57¢ (-3.6%). Ditto for platinum and palladium, which fell by over $30/oz and $20/oz, respectively.
Clearly the losses were not a result of investors chasing gains in the stock markets, as if often the case when consolidation in the gold market is seen. Instead, the major impact for the precious metals came from the Federal Reserve, which signaled a more aggressive outlook for its schedule of interest rate hikes throughout the rest of the year, the first of which may come at the April meeting of the FOMC.
The hawkish tone struck by members of the Fed (such as Philly Fed President Patrick Harker and Chicago Fed President Charles Evans) helped lift the dollar against its peer currencies. The DXY dollar spot index rose 0.5% to above 96.1. A strong greenback generally dents gold. It would seem that this action in the foreign exchange (forex) markets combined with the pivot toward imminent rate hikes by the Fed is what drove gold ETF share prices lower, as well.
Long-term Gold ETF Outlook Still Strong
However, just as the safe-haven flight into gold following the terror attacks on Tuesday appears to have been a largely momentary move, the same fleeting effect applies to today’s chatter from the Fed. According to Georgette Boele from the Dutch bank ABN Amro, “The Fed (officials) comments put a bit of pressure on the gold price but are unlikely to derail a more positive long-term sentiment towards the metal.”
As far as international demand for precious metals is concerned, Switzerland provides a bullish example. Not only did the Swiss receive nearly 365,000 troy ounces of gold worth 443 million Swiss francs ($456 million) from Venezuela last month, but the small central European financial center also saw net imports of platinum from South Africa.
The global outlook continues to support robust demand for physical precious metals and gold ETFs generally due to relatively weak yields for sovereign bonds around the world as well as poor overseas earnings for American corporations. With little incentive for investors to hold bonds in the current low interest-rate environment (even subzero rates in many cases), gold continues to be an attractive way to store one’s wealth. This is where ETFs such as IAU, SGOL, and GLD fit into the picture. It is worth noting, however, that GLD has seen better than twice the inflows ($6 billion) compared to any other gold ETF so far this year.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.