Despite the vastly greater benefits of holding physical precious metals compared to an exchange-traded fund (ETF) share or contract, there's no denying that these funds are used as a yardstick of sorts for market sentiment regarding gold and silver.
Here, we will consider the reasoning behind both rising and falling ETF prices in the precious metals space.
SPDR Gold Trust (GLD)
By and large, the gold ETF market is continuously driven by near-term speculation. While a sound long-term investment strategy this does not make, you can see why it may be useful as a measurement of sentiment. More than anything else, the positioning of speculative traders in the gold market will be revealed by the performance of gold ETFs like the SPDR Gold Trust (GLD). Since markets opened on Tuesday, GLD has risen 2.1% to a fresh three-week high above $121 per share.
The recent rebound for gold prices has been largely attributed to growing uncertainty and anxiety regarding the U.S. economy. Naturally, this wave of buying followed a particularly bad jobs report (the worst since 2010) that fell far short of expectations. However, up to that point, the financial markets had been swimming along fairly steadily.
Mikz Economics suggests that, "Considering the extremely low level of financial market volatility at present due to a strong risk appetite, a wave of risk aversion is likely to emerge. Against this, investors are likely to position their portfolios in a defensive manner so ETF buying should remain steady or pick up at a stronger pace should fears in the market reappear. Then, depending on the outcome and the resulting effect on the financial markets, ETF buying could reverse (if no risk-aversion appears) or explode (if a sell-off in risky assets becomes uncontrolled)."
Speaking to this rising level of risk aversion is the Treasury market: the 10-year Treasury yield is down to a paltry 1.70%, the lowest in recent memory. This indicates that no matter how steady financial markets have seemed, with the Dow Jones Industrial Average rising back above 18,000, investors are still hedging their bets with the perceived safety of government bonds. Gold is widely seen as the preferred safe haven from such risk, however.
Nevertheless, GLD could be undermined by better economic data going forward. This potential outcome looms especially large if the Federal Reserve indeed raises interest rates this year. (Multiple rate hikes seems dubious at this point, though, given risk factors such as Brexit and the U.S. presidential election.) Mikz points out that physical gold demand is at seasonal lows but could pick up in fourth quarter for the same reason—seasonally strong demand for gold during India's wedding season.
Silver ETFs Poised to Pop?
Given its unique industrial dynamics and much lower price point, silver generally responds in a more volatile fashion than its cousin gold. It's seen by many traders and investors as a more high-risk, high-reward play among the precious metals for this reason. Although no market is perfectly predictable, silver tends to outperform gold when prices are rising. This hasn't happened yet, suggesting that it may soon be silver's "time to shine."
As it pertains to ETFs, the iShares Silver Trust (SLV) and the ProShares Ultra Silver (AGQ) funds are the two preferred vehicles for such speculation. These ETFs surged following silver' gallop back above $17/oz this week, its highest trading level since the end of April.
Current analysis on Seeking Alpha is fairly bullish on silver by citing historical precedent: "look at the chart between 2008 and 2011 when silver went from under $10 an ounce to almost $50 an ounce. Intermediate cycle bottoms in this time frame took place at much higher levels and never got ultra pessimistic like we had over the last five years. If we indeed have bottomed from here, this could be the confirmation that a long bull run lies ahead of us where rallies will be much longer than declines."
Therefore, don't worry about some periodic lows in silver prices, and focus on its outlook over the long run, instead.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.