For those who like to take their chances in the “paper gold” markets rather than holding physical metal, the first quarter of 2016 has been rather kind to the intrepid investor.
Especially in comparison to the performance of other exchange-traded funds, this has undoubtedly been the Year of Gold.
Even after a brutal week to end March, the first quarter shone magnificently on gold and its related assets. The largest gold ETF, the SPDR Gold Shares (GLD) posted a 16% gain during Q1. The pullback was to be expected after gold prices rallied better than 20% in less than three months to start the calendar year. Buying momentum finally cooled off following some rather optimistic rhetoric about raising interest rates this year from various governing members of the Federal Reserve system.
However, the slowdown in fresh inflows into GLD and other similar gold ETFs hasn’t translated into aggressive selling. As the chart above shows, trading volumes have remained in the 10 million range. This has remained true even after the fund’s share price retreated from $121.50, just shy of its 52-week high of $122.37/share.
There are two good reasons for this. First, it indicates that even the traders interested in a quick buck who jumped into GLD are willing to hold onto their shares for longer with the global economy still on shaky footing. Second, nearly a quarter (23%) of GLD shares are held by institutional investors. These big financial firms are usually keener about maintaining positions in gold for the longer term as a hedge to their huge portfolios.
Even after this recent correction in gold ETFs, Investors Business Daily (IBD) still gives GLD a Relative Strength Rating of 84. This means that the fund has outperformed 84% of all other ETFs.
Reasons for Optimism
Even though a hawkish tone from the Fed was the main driver of the correction in gold, the current economic landscape still provides reasons to be bullish about the yellow metal. Outside of the U.S., the trend is not toward tighter monetary policy but even lower—negative—interest rates. According to a note from the World Gold Council (WGC), “History shows that, in periods of low rates, gold returns are typically more than double their long-term average.” The WGC went on to point out that nearly one-third of high-quality sovereign debt (over $8 trillion) currently trades at negative yields. Another 40% of sovereign debt (i.e. government bonds) is yielding below 1%.
Central banks continue to pile up gold as fiat currencies lose favor. Not surprisingly, the central banks adding the most gold sport some of the world’s worst-performing major currencies like the Chinese yuan and Russian ruble.
Analysts at Investors.com give four solid reasons related to macroeconomics that make the case to remain bullish on gold:
- Ongoing currency wars and lack of confidence in the crumbling fiat money system
- Low interest-rate environment mitigates opportunity cost of holding gold
- Central banks are running out of ammunition to combat volatility and inflation/deflation
- The pool of other viable assets besides precious metals is dwindling
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.