Among commodities, perhaps only oil garners more attention than gold. And among commodities exchange traded products, none are larger than the SPDR Gold Shares (NYSE: GLD), the world's largest exchange traded fund backed by physical holdings of gold.
Gold and ETFs such as GLD are facing a potentially tricky near-term environment as the Federal Reserve heads toward its first interest rate hike of 2017. That could explain why GLD is lower by more than 3 percent over the past week.
Gold is more attractive when interest rates because there's no yield as there's on a bond fund, meaning capital appreciation is the only way investors in these products are compensated for taking on gold market risk. On the other hand, data suggests inflation is rising, which could bode well for gold ETFs because the yellow metal is often embraced as an inflation hedge.
All that confirms is there are climates when gold works and when it does not, but data suggest gold has recently topped hedge funds and liquid alternatives strategies. Those strategies have been losing investors' capital due in part to their inability to provide promised lower correlations to equities, something gold continues making good on.
“One of the reasons for the reversal of fund flows is that while hedge funds and liquid alternatives are often used to seek portfolio diversification, recent market performance shows these assets do not always behave as expected and can lead to increased correlations within portfolios,” according to State Street Global Advisors (SSgA), GLD's issuer.
For investors looking for an asset class that shows relatively low correlations to widely followed equity benchmarks, gold makes sense.
“Gold also had only a 0.26 correlation with the S&P 500 Index and an even lower correlation, 0.14, with the MSCI World Index, from December 31, 2004 to December 31, 2016,” said SSgA.
Even with aforementioned Fed risk, some analysts see upside ahead for gold. In a note out Wednesday, Bank of America said it sees gold prices rising 0 per ounce by the end of 2017.
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