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Gold in Focus: Can Precious Metal ETFs Continue to Rally?

Zacks Equity Research

Investors who thought that gold will continue to do badly this year as well were definitely caught on the wrong foot, at least going by latest trends. The precious metal which lost roughly 30% last year, the most in more than three decades, has gained back around 10% since the start of the year.
The metal had slumped last year in the wake of taper concerns, a strong dollar and an equity market rally. 2013 also marked an end to gold’s 12-year bull run, but some positive trends are formulating for this year.
Gold has recently shown some strength on the back of renewed geo-political tensions between the West and Russia over Ukraine and is currently hovering near its three-week high. Following the annexation of Crimea, Russia has been blamed for sending troops to the Ukraine border.
The violence between pro-Russian separatists and Ukrainian government forces has been escalating each passing day, pushing up gold’s appeal as a safe heaven (read: Any Hope for Gold ETFs in 2014?).
Pro-Russian separatists have paid deaf ears to an ultimatum to vacate occupied government buildings in eastern Ukraine and have in fact seized more buildings after the government failed to carry out its crackdown threats, according to a Reuters report.
Around 40,000 Russian troops are believed to be present in the vicinity of the Ukrainian border in addition to the 25,000 Russia troops based illegally in Crimea.  
Russia is expected to face tougher censure and even more severe sanctions from U.S. officials following the recent worsening of the crisis, which experts think is an attempt on Russia’s part to add more to its territory. 
The U.S. and the European Union had earlier lifted a host of sanctions on Russia, including blacklisting Russian officials and businessmen. It is expected that the U.S. might further step up its sanctions on Russia and impose sector sanctions in energy, banking and mining (read: March ETF Report: U.S. Equities Thrive, Emerging Markets Suffer).
Moreover, the yellow metal also gained strength as the Fed recently signaled tapering at a rate slower than what was earlier predicted by most market experts.  Rock-bottom interest rates and a weak-global economy were the primary reasons for the spectacular rally gold witnessed from December 2008 to June 2011, during which it rose around 70%.
Escalating geo-political tensions, a weak equity market and a sluggish pace of U.S. recovery are believed to be the primary factors for gold regaining strength. The demand for gold as a safe haven metal is once again on the rise.
Concerns as Well
Despite the move higher by gold in recent sessions, Tuesday saw a big drop for the precious metal. Concerns reached a fevered pitch over gold demand in China, as well as a stronger dollar, forcing many to sell off their positions in the yellow metal. In fact, gold retreated below the $1,300/oz. mark in Tuesday trading on the news.
This shows that gold is by no means in a straight up trajectory following its massive slump last year, and that losses are definitely possible despite the overall short term bull trend.
Even with the drop, the most popular gold ETF – SPDR Gold Trust (GLD) – having an asset base of $34.3 billion has gained over 6% to start the year. Other ETFs such as Physical Asian Gold Shares (AGOL), COMEX Gold Trust (IAU), Physical Swiss Gold Shares (SGOL) and DB Gold Fund (DGL) have also recorded similar gains in the time frame, and many are close to break even for the trailing fifty two weeks as well (see all Precious Metals ETFs here).
Meanwhile, gold mining ETFs have performed even better, with the broad Market Vectors Gold Mining ETF (GDX) adding roughly 9% and the small cap-focused Market Vectors Junior Gold Miners ETF (GDXJ) soaring by nearly 9% so far this year as well.
Bottom Line
Though the yellow metal is making the most of the political crisis, some experts believe that the current rally is likely to fizz out, especially after the recent move lower. Two of the major banks – Morgan Stanley and Goldman Sachs Group – are bearish on gold and favor equity and credit over safe haven assets (read: AdvisorShares Launches 4 Innovative Gold ETFs).
Moreover, demand in China, the world’s biggest gold consumer, is likely to remain suppressed this year due to growth concerns there. A recent estimate from the World Gold Council suggests that the demand for bullion is likely to remain flat in 2014.
Falling demand from China, which saw its appetite for gold expanding every year since 2002, might threaten the recent recovery in gold prices. Moreover, a positive outlook on the U.S. economy for this quarter and for the second half of the year is also expected to dampen gold’s return, suggesting that the recent run in gold prices might lose some steam in the coming weeks
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