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5 Reasons Why Gold ETFs May be Up for a Rebound

May 24, 2017

Gold prices are back on a rallying mode having returned about 0.7% in the last five days (as of May 23, 2017). The metal was on the wrong end of the Trump-induced market rally at the end of 2016, registering "its second-worst quarter in 18 years."

The greenback surged on an improving U.S. economy and hopes of fiscal reflation in Trump administration which did miracles for stocks. Increased inflationary expectations and a Fed rate hike gave a solid boost to U.S. Treasury bond yields which in turn punished non-interest bearing assets like gold. The metal lost almost 13% in Q4.

However, the metal has gathered steam lately. Let's find what caused this rebound and how long the rally could last.

Fading Trump Rally

Donald Trump, once a destroyer of gold pricing, turned out to be the rescuer. Lately, the President has been facing multiple allegations and opposition has even demanded his impeachment. This, in turn, put all his pro-growth promises at risk and caused the market to turn volatile. As a result, gold - the safe haven asset - got a fresh lease of life (read: Best ETF Strategies for Trump Uncertainty ).

Dollar at Subdued Level

The Fed has announced that it will enact two more rate hikes this year after a rise of 25 bps in March. This along with some weaker-than-expected U.S. economic data weighed on the greenback. PowerShares DB US Dollar Bullish ETFUUP (UUP) has lost about 5% so far this year (as of May 23, 2017). Since gold price shares an inverse relation with the greenback, a subdued dollar has come as a boon to gold investing.

If the Fed hikes in the June meeting, the trajectory should not be too steep. Even the bond master Jeffrey Gundlach doesn't see enormous strength in the currency in the Fed policy tightening cycle and expects gold to "have another leg up" (read: Follow Gundlach's Insight with These ETFs ).

Negative Interest Rates

With three rate hikes this year and in the next, the real interest rates in the U.S. are likely to be in the deep negative territory, as per some analysts. If this is not enough, most central banks across the world including Bank of Japan, the Swiss central bank or the ECB are pursuing negative interest rates to promote growth. On the other hand, the inflationary outlook is finally looking up in the developed economies, albeit slowly. This, in turn, would be favorable for non-interest bearing assets like gold.

Geopolitical Risks

Investors should also note that though the price of the yellow metal has steadied with the possibility of political risks in Europe including Brexit worries, UK election in June, talks of Scotland's independence vote and occasional terror attacks have brightened the prospects of this safe-haven metal (read: Safe Haven ETFs to Evade Geopolitics & Weak Economic Data ).

Stocking by Indian Jewelers

India is a major consumer of gold. The country's jewelers have lately been adding to the inventory ahead of a national sales tax slated to be enacted on July 1, as per Reuters . While this could brighten demand now, India's gold import and the global gold price may lose ground in the second half of the year - the key selling period or the festive and wedding season.

Bottom Line

As of now, the metal seems due for a rebound, though the run may not be long enough. So, investors intending to profit out of the new-found optimism in the gold space may consider gold ETFs like SPDR Gold SharesGLD (GLD), iShares Gold TrustIAU (IAU) and ETFS Physical Swiss GoldSGOL (SGOL).

For fatter returns, investors can also play leveraged products like VelocityShares 3x Long Gold ETN UGLD , DB Gold Double Long ETN DGP and ProShares Ultra GoldUGL (UGL). However, leveraged ETF plays involve greater risk.

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