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Gold ETF: Should You Follow Soros or Go Bottom Fishing?

Proving everyone wrong, gold failed to enjoy Trump’s victory. Market pundits thought that Trump’s isolationist ideas on external trade and immigration may lead to a U.S. recession and brighten up the safe haven asset gold.

But in reality, exactly the opposite happened with markets rallying post election on hopes of loose fiscal policies and touching the all-time highs. Naturally, gold made a sharp dive and touched a five-and a-half month low. In the last 10 days (as of November 23, 2016), GLD lost over 6.8% (read: Fed or Trump: Who Will Decide the Fate of Gold ETFs?).

Factors (Apart from Trump) to Hurt Gold

Not only Trump, the Fed also played its part in dulling the yellow metal. A Fed rate hike is not favorable for gold bugs as the move means dollar strength which in turn will weigh on commodity prices including gold. Already, the U.S. dollar has hit a 13-year high and had a role in hurting commodity investing (read: ETF Winners & Losers as Dollar Hits 13-Year High).

With the U.S. economy on the mend, several economic readings coming in sound and inflation expectations growing, the central bank is quite likely to raise interest rates in its December meeting. At the time of writing, federal funds futures contracts indicated a 100.2% probability of a December rate hike.

The Fed is now expected to hike in the range of a half-point and three-quarters of a point, up from the ongoing range of 25 bps to 50 bps. Investors should note that the additional 0.2% to 100% hints at negligible chances of the Fed being more hawkish, as per MarketWatch.

Yellen specifically indicated that a prolonged low-interest policy may goad unnecessary risk-on sentiments, create a bubble in markets and weaken the financial strength of the economy. After December, traders now see one or two more hikes by September 2017.

India – the second largest consumer of bullion – is yet another factorthat hit gold prices hard. First, India’s recent demonetization led to cash crunch in the peak of a wedding season and weighed on gold purchase. The withdrawal of high denomination Indian currency was an attempt to eradicate unaccounted money (read: India ETFs Tangled Between Note Demonetization & Trump Win).

Gold transactions in India is mostly done by cash, making it a fitting way of using ‘black money.’ With such a clampdown, investments in gold are likely to go down in the coming days.

Also, India imports about 700 tons of gold every year on average. Now speculation is rife that the Indian government may enact curbs on gold import. “If this happens, there is a high probability of a one-day drop in gold that could reach $200’, as per MarketWatch.

Follow George Soros

No doubt, warning bells are ringing over gold investments. Billionaire investor George Soros is washing his hands of gold. In the second quarter, Soros Fund Management offloaded its “position in SPDR Gold Shares worth $30.4 million as of June 30, according to a regulatory filing.” Soros left gold following the metal’s enormous 25% gains in the first half. Gold price is presently trading at $1,186 an ounce and may experience further weakness on Fed and Trump (read: Reversal Ahead for Gold? ETFs in Focus).

Anything Can Save Gold?

The killer ‘Trumpflation’ may turn out to be a savior. If inflation picks up with a recovery in energy prices (as lower oil price is one of the main causes of subdued global inflation) and on Trump’s policies, like a boost in infrastructure spending and tax cut, there will be no threat to gold (read: Gold ETF Investing: 10 Facts Investors Need to Know).

Gold is often viewed as a hedge against inflation. One of the pre-requisites of the Fed hike is higher inflation. So, if the Fed makes faster moves going forward, there has to be some noticeable uptick in inflation, which in turn is likely to boost demand for inflation-protected assets like gold.

Falling supplies can also offer some support. As per the source, mining analysts cut down gold supply projection from the 30 tons once forecast to 20 tons by 2025. Due to about 30% decline in gold prices in the last five years, gold companies curtailed investments. And this shrinkage in capacity may translate into price stabilization.

Bottom Line

So, it is clear that gold investing is not that favorable with a short-tern view, but may make a long-term bet. It all depends on how fast the Fed turns hawkish and how aptly Trump delivers on his promises.

Till then, keep a close watch on gold bullion and mining ETFs like SPDR Gold Shares GLD, VanEck Merk Gold Trust OUNZ, VanEck Vectors Gold Miners ETF GDX and VanEck Vectors Junior Gold Miners ETF GDXJ.

Investors intending to profit out of the current adverse situation may short gold with ETFs like ProShares UltraShort Gold GLL and DB Gold Short ETN DGZ. Examples of inverse gold mining ETFs are Direxion Daily Junior Gold Miners Index Bear 3X ETF JDST, Direxion Daily Gold Miners Index Bear 3X Shares DUST, ProShares UltraShort Gold Miners ETF GDXS and Direxion Daily Gold Miners Bear 1X ETF MELT (read: Profit Out of Bleeding Gold Mining ETFs).

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SPDR-GOLD TRUST (GLD): ETF Research Reports
VANECK-GOLD MNR (GDX): ETF Research Reports
VANECK-JR GOLD (GDXJ): ETF Research Reports
DIR-D GMI BR1X (MELT): ETF Research Reports
DB-GOLD SHORT (DGZ): ETF Research Reports
VAN ECK MRK GLD (OUNZ): ETF Research Reports
PRO-ULS GOLD (GLL): ETF Research Reports
DIR-D GM BR 3X (DUST): ETF Research Reports
DIR-DJGMI BR 3X (JDST): ETF Research Reports
PRO-ULS GLD MNR (GDXS): ETF Research Reports
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