Commodity Trade Mantra

Who Will Decide the Fate of Gold ETFs? The Fed or Donald Trump

Who Will Decide the Fate of Gold ETFs? The Fed or Donald Trump

Who Will Decide the Fate of Gold ETFs? The Fed or Donald Trump

Gold – the star performer of this year – is presently sitting on the fence with possibilities and perils carving out its future run.

A rush to seek safety for the most part of 1H16 triggered by global growth issues and a major event like Brexit at the end of the second quarter bolstered demand for safe haven assets like gold this year. Plus, a subdued greenback amid no fresh Fed rate hike so far this year has given a boost to this precious metal. Gold bullion ETF SPDR Gold Shares GLD is up about 26% so far this year (as of August 22, 2016).

What Lies Ahead?

Now, the rest of 2016 is quite eventful with two major occurrences lurking, one is the presidential election in November and the other is the possible Fed rate hike.

Fed Tightening Scenario: A Negative for Gold

A Fed rate hike is not a favorable for gold bugs as the move means dollar strength which in turn will weigh on commodity prices including gold. This is because these commodities are priced in the greenback. This is truer giventhat Fed Vice Chairman Stanley Fischer recently gave hints of an imminent Fed rate hike, echoing a few other members.

Fischer suggested the Fed is approaching its goals of “maximum sustainable employment and an inflation rate of 2%’. This very comment clearly indicates that he is in favor of further interest rate hikes this year. In fact, following Fischer’s comments, dollar ETF PowerShares DB US Dollar Bullish Fund UUP gained while GLD reacted negatively. GLD was down about 0.2% on August 22 and it shed about 0.1% after hours (read: Hawkish Fed Vice Chairman Adds Strength to These ETFs).

But Can Trump’s Win Brighten Gold Further?

As per an article published in Financial Times, Citi’s strategists believe that historically, U.S. elections do not impact gold prices much. But this time, it is a different case as Democrat candidate Clinton and Republican candidate Trump share way dissimilar views over the economy.

Though as per huffingtonpost pollster, Clinton has higher chances of winning with 46.9% votes and Trump with 39.6%, the investing case needs to discussed if Trump wins. And so far, most of Trump’s delivered speeches are “inward looking”, as per ABN Amro. As per the research organization, Trump’s policies may hinder U.S. growth and thus may cause an upheaval in the U.S. market pushing the safe-resort gold to as high as $1,850 (read: Does The Donald Hold The Trump Card for Gold ETFs?).

Citigroup sees gold prices touching $1,400 levels ‘not seen since early 2013’, while the metal will likely slide to the $1,250 level if Clinton makes it to the White House. Citigroup believes that Trump’s “protectionist ideas on external trade and immigration, if realized, suggest a US recession sooner rather than later.” The idea of building Mexico Wall or his proposed embargo on Muslim entry may upset the U.S. economy and risky securities, and thus drive a safe-haven rally (read: Gold ETFs to Watch as Trump Races Closer to Clinton).

Moreover, Trump is ‘a low interest rate person’. Concerned about the U.S. economy’s $19 trillion of debt, Trump wants to keep the interest rate low ahead so that the country does not have to end up paying a much higher interest payment.

Nomura has also joined the Trump-Boosting-Gold group as it believes “a Trump presidency could well trigger higher macro risks globally with investors further allocating assets to gold.”

As per UBS, the Fed may hike rates in December, and thus the latest dip can be used as a buying opportunity as a September move is less likely. The research house also believes that “the Fed’s ability to raise rates is more constrained relative to previous cycles,” going by the article published in Financial Times.

Not to Fear Fed Chest Thumping; Go for Gold?

All in all, gold is likely to win ahead with rock-bottom interest rates prevailing in most of the corners of the developed world. Even if the Fed hikes rates ahead, it would not likely be more than 0.25%, which can be digested by the market. The recent dip in prices also steers clear of overvaluation concerns in gold, giving it a fresh way to run (read: Reversal Ahead for Gold? Gold ETFs in Focus).

If this was not enough, since 1900, the annualized return of the Dow Jones Industrial Average Index was 7% in the Democratic rule and 3% in the Republican rule. It means that Democrats are good for stocks and Republicans are less beneficial for the risky stock market.It also means that safe havens like gold should shine more under Republican presidency (read: Gold ETFs Rally Unstoppable after 2 Beaming Quarters).

Gold ETFs in Focus

Investors may thus keep a watch on gold ETFs like GLD, iShares Gold Trust ETF IAU, ETRACS CMCI Gold Total Return ETN UBGVan Eck Merk Gold Trust ETF OUNZETFS Physical Swiss Gold Shares ETF SGOLand PowerShares DB Gold Fund DGL .

 

 

 

Courtesy: Sanghamitra Saha

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