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Gold ETFs Could Pale as Risk-On Sentiment Takes Hold

This article was originally published on ETFTrends.com.

Gold and gold ETFs enjoyed a bounce late last year as the heightened market volatility pushed investors to safety plays, but a renewed risk-on environment could put the gold rally in jeopardy.

The SPDR Gold Shares (NYSEArca: GLD) increased 7.7% over the past three months, with gold futures trading at around $1,289 per ounce, or its highest level since June, while the S&P 500 declined 6.3%.

However, investors remain largely confident that the U.S. economy will still expand, which may benefit riskier assets like stocks. Furthermore, while gold has somewhat benefited from the dovish stance from the Federal Reserve since a lower-for-longer interest rate would weaken the U.S. dollar and support gold prices, the same Fed comments would also bolster stocks and other risky bets for the year.

If an investor is wary of a potential pullback in gold prices, one may look to inverse or bearish gold plays. For example, the ProShares UltraShort Gold (GLL) provides a two times inverse or -200% daily performance of gold bullion. Alternatively, ETN options include the DB Gold Double Short ETN (DZZ) , which tries to generate the twice inverse or -200% return of the daily performance of gold; DB Gold Short ETN (DGZ) , which tries to reflect the inverse of gold price movements; and VelocityShares 3x Inverse Gold ETN (DGLD) , which tries to reflect the performance of three times the inverse or -300% daily performance.

Gold prices continue to bounce around as traders weigh the Fed outlook.

With gold, “the buying we’re seeing come in is cautious,” Bob Haberkorn, senior market strategist at RJO Futures, told the Wall Street Journal. “People are buying it mostly because of what’s going on with the Federal Reserve. That’s a different type of buying.”

“If the Fed does in fact turn neutral to dovish, the rally in gold will be in contained because equities will also turn higher,” Haberkorn added.

Related: Top 34 Gold ETFs

Hedge funds and other speculative traders remain wary of the gold play. Bullish bets on prices have barely exceeded bearish wagers for the week ended December 18, according to the latest data from the Commodity Futures Trading Commission. In contrast, during the second half of last year, bearish bets topped bullish plays.

The current sentiment on a potential resolution to the U.S.-China trade fight has also weighed on the gold outlook since an end to the trade war would improve the global growth outlook and risk-on play.

For more information on the gold markets, visit our gold category .