Gold ETFs Glitter
If you haven’t noticed already, stocks haven’t been the only market to rally in the past couple of months. Gold has been on a strong resurgence since the mid-August lows of last year. Back then, the price of gold bottomed around $1160 before embarking on a sustained rally for the past six months. As of Tuesday afternoon (2/19/2019), gold hit a high around $1341, which represents more than a 15% rise from the lows. On Tuesday alone, price surged more than 1%. This has boosted both the GLD ETF, which holds physical gold, as well as the fortunes of gold miners as represented by the GDX ETF. In short, we’ve seen gold ETFs glitter like we haven’t seen in a while.
Why Gold Has Been Surging
There are a couple of factors helping to boost the price of gold. One of these factors is falling interest rates and bond yields, as shown in the U.S. Treasury’s plunging 10-year yield since November. When interest rates fall, non-interest-bearing gold has less competition from interest-bearing instruments. As a result, gold prices and demand for gold tend to rise.
Also, since gold is most often denominated in U.S. dollars, gold and the dollar are generally inversely correlated. As a result, when the dollar drops in value, gold prices tend to rise, and vice versa. The price of the U.S. dollar index as of Tuesday is right around where it was in mid-August of last year. Though there was a lot of fluctuation in the interim, the dollar has remained relatively strong throughout. So gold strength can hardly be attributed to any weakness in the dollar.
Finally, gold is considered a safe-haven asset, which means that investors tend to buy gold when they are concerned or fearful about global political and economic conditions. Judging by the positive trajectory of the stock market, though, it doesn’t seem that investors are too worried. However, there are still serious risk conditions on the horizon. This includes the ongoing uncertainty of U.S.-China trade talks. Related to this, fears of a slowing global economy continue to weigh. Finally, there’s that thorny issue of Brexit. In the next several weeks, the world is bracing for Brexit-related developments that could make massive waves in the U.K., all of Europe, and beyond.
Where Do Gold ETFs Go From Here?
So where does this leave the gold-based ETFs? As we can see on the chart, the GDX gold miners ETF has risen over 27% in the past six months. At the same time, GLD, which tracks gold prices much more closely than GDX, has risen around 14% in the equivalent time frame. These are certainly strong numbers, especially for slower-moving ETFs (in contrast with individual stocks). GDX has been driven substantially higher by the combination of a strong stock market as well as surging gold prices.
With gold momentum still on the rise, we could be seeing significantly more upside for both of these ETFs.
IMPORTANT: The information above should not be construed as investment advice and should not be considered as a solicitation to buy or sell securities. Trading and investing in the financial markets involves substantial risk of loss, and may not be suitable for all investors.
Disclosure: At the time of this article’s publication, we have no position in any security or trade/investment mentioned, nor do we have any business relationship with any company whose stock may be mentioned.
Senior Market Analyst at The Technicals
A veteran global macro trader/analyst, Bart focuses on major market moves in currencies, commodities, fixed income, and global equity indexes. Bart stresses inter-market correlations and dynamics while keeping a close eye on risk. He has published countless market analysis pieces and has been a guest expert for a variety of major financial media. Contact Bart