4 Reasons Why A Gold ETF Rally Can Last
San Francisco (July 8) The shocking vote by the UK to leave the European Union sent gold soaring to its two-year high as investors sought safety in the wake of political and economic uncertainty generated by the event. Even before Brexit, investors were snapping up the precious metal this year due to concerns about anemic global economic growth, slowdown in China and oil price plunge. Gold is now up about 29% this year so far and about 9% since the Brexit vote.
Gold is no doubt becoming a crowded trade now. Many investors wonder whether gold can continue to shine considering "too much too soon" rally. Today's strong jobs report raised further questions about the sustainability of the rally. (Read: Gold ETF Investing-10 Facts Investors Need to Know )
Let's look at the reasons that are likely to keep the gold rally alive this year.
Fragile Global Economy
Earlier this year, IMF had cut its global growth forecast for this year to 3.2%-- its fourth straight cut in a year-putting growth just marginally above 3% rate the IMF has previously considered a technical recession globally. The IMF also warned investors "they shouldn't be complacent about the myriad risks threatening to derail an increasingly frail global economy."
After Brexit, the IMF further trimmed its economic growth projection for the Euro-zone. While Brexit induced financial market turmoil appears to be coming to an end now, the economic consequences will be clear only in the medium-to-long term. A lot of depend on what kind of deal Britain will be able get from the European Union. (Read: Brexit Fuels a Global Rally in Bond ETFs )
Recent manufacturing data out of China suggests that the economy further slowed down during the second quarter as factories continue to struggle with excess capacity, slowing demand and rising debt. Overall, we are likely to see very weak global economic growth environment this year.
Macroeconomic and Political Uncertainty
Investors hate uncertainty and Brexit has just added more uncertainty to global financial markets. Growing political uncertainty in the US and Europe suggests that markets may see several bouts of turmoil in coming months. Investors tend to seek refuge in safe havens during periods of turmoil and that may keep bullion prices elevated this year.
Gold acts as a hedge in uncertain times. During times of stress, investors also realize the importance of diversification in portfolios. Gold is negatively correlated with equities and adds diversification benefits in a portfolio.