Gold ETFs Can’t Put The Fed To Bed
New York (Oct 30) For a while, the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL) and other gold exchange traded products were looking solid as market participants believed the Federal Reserve would keep interest rates near zero for the foreseeable future.
However, following yesterday’s Fed news, traders now believe the central bank will boost borrowing costs in December, news that endangers gold ETFs.
Gold is seeing greater support from safe-haven demand after currency devaluations across Asia added to investment demand for a better store of value than paper currencies or stocks and bonds. Bullion was recovering lost ground after dropping to a five-year low last month on concerns that the Fed would hike rates as early as September. Obviously, a rate hike for 2015 can now only happen in December.
Although precious metals ETFs have recently displayed some strength, gold is still in a lengthy bear market, giving some traders pause about how much more near-term upside the yellow metal has in store. [Doubters in Gold Rally]
GLD, the world’s largest ETF backed by physical holdings of gold, has added nearly $1 billion in new assets since the start of August and the fund is also drawing bullish options bets.
“Calls on the fund’s shares rising above $125 by mid-January, up about 12 percent from its current level, represent the biggest block of open interest in the fund’s options with 86,000 contracts open,” reports Reuters. “Data from Commodity Futures Trading Commission last week showed that speculators raised their net long position in gold futures by 32,725 contracts to 82,546 contracts, highest since mid-May.”
Looking at ETFs, GLD has attracted $314.5 million in net inflows so far this month, according to ETF.com. Holdings in gold-backed ETFs also climbed by 11 metric tons in October to 1541.1 tons, the largest increase since February.
Furthermore, government data shows that long gold positions have surged while short wagers declined.
Gold assets look more attractive in a low interest rate environment as the precious metal is more competitive against assets that pay low interest, like bonds. Additionally, if the Fed holds off on a rate hike, it would suggests the economy is not as strong, which would also help gold attract safe-haven demand.