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Gold ETFs Tussle Between Geopolitics and Fed

Sanghamitra Saha

Gold investing is in a tug of war between two opposing forces – geopolitical tensions and a hawkish Fed. On the one hand, flared up of geopolitical risks and mixed job data for the month of March are trying to trigger market risks and the resultant safe-haven rally.

On the other hand, moderately upbeat U.S. economic sentiments, optimism about U.S. corporate earnings and the Fed’s policy tightening are likely to push up bond yields as well as the greenback.

Gold’s Upbeat Performance in the Last One Month

The price of the yellow metal steadied lately with the possibility of gradual rate hikes and political risks in Europe including Brexit worries, French elections and talks of Scotland’s independence vote (read: What Could Happen if Le Pen Wins? ETFs in Focus).

Investors should also note that the Fed’s dovish guidance on the future rate hike trajectory and market slump on Trump’s policy concerns spurred safe-haven trade, thus pushing up bond yields lately.

PowerShares DB US Dollar Bullish ETF UUP was down about 0.3% in the last one month. These issues helped the safe-haven asset gold. The largest gold bullion ETF SPDR Gold Shares GLD added about 4.1% in the last one month (as of April 10, 2017).

How Has Gold Fared Last Week?

The metal dropped in the last five-week period (as of April 10, 2017) despite a flare-up in geopolitics. Uncertainty in the Middle East following the U.S. airstrike on Syria government’s airbase in response to Syrian military’s chemical attack on dozens of citizens, deployment of a strike group by the U.S. navy toward North Korea, a series of terrorist attacks in Europe and the French presidential election spooked investors.

In such circumstances, gold prices should return gloriously. Instead, GLD was down 0.2% in the last five days. The Fed’s indication of deleveraging its balance sheet this year along with moderate rate hikes must have strengthened the U.S. dollar as evident from 0.5% gains in UUP in the last five days (as of April 10, 2017) (read: ETF Strategies to Win if Fed's Reverse QE Hits Soon).

What Lies Ahead?

Going forward, possibilities for a gold rally looks moderate. So far, the U.S. market has been flying on Trump’s pledges for fiscal reflation and deregulation. Now, how many of the promised measures translate into reality remains to be seen (read: Are Gold ETFs Gearing Up for a Rally?).

If economic measures taken by Trump take time to materialize, there could be a correction in stocks. Volatility levels might flare up, opening up scope for a gold rush. Also, the inflationary outlook is in the pink for developed economies. And, gold is often viewed as a hedge against inflation. Having said that, as of now, the global inflation level is not that steep to give a material boost to gold prices.

Also, if market watchers take the U.S. central bank’s plan to trim reinvestments into Treasuries and mortgage-backed securities very seriously, gold prices may see a rough patch. Most recently, Fed officials like Dudley and James Bullard repeatedly pointed to the reduction of the Fed’s $4.5 trillion balance sheet.

ETF Performances

Both the contrasting factors kept gold ETFs relatively flattened in the last five trading sessions, not letting these join the safe-haven party. Funds like GLD, iShares Gold Trust IAU, ETFS Physical Swiss Gold SGOL and PowerShares DB Gold Fund DGL were up 0.09%, 0.08%, 0.12% and 0.15%, respectively.

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ETFS-GOLD TRUST (SGOL): ETF Research Reports
 
SPDR-GOLD TRUST (GLD): ETF Research Reports
 
ISHARS-GOLD TR (IAU): ETF Research Reports
 
PWRSH-DB US$ BU (UUP): ETF Research Reports
 
PWRSH-DB GOLD (DGL): ETF Research Reports
 
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