ETFs that track gold prices, as well as those made up of gold mining stocks, are certainly off to good start in 2016. To be sure, five solid trading sessions cannot erase the multi-year slump and the pain of staggering losses over the time for these types of funds. Nonetheless, the solid opening to the new year may spell an imminent turnaround for gold ETFs and gold mining ETFs as a whole.
Throughout the past few years, the narrative in the gold ETF market has been one of dread. The appeal of these kinds of funds backed by bullion began to wane as the Federal Reserve drew closer and closer to raising interest rates for the first time in a decade. Investors' reasoning was clear: as interest rates rise, the opportunity cost (the missed chance to invest money elsewhere) of holding gold also rises. This persistent expectation first came to fruition when the FOMC raised the federal funds rate by 25 basis points in December.
As a result, the gold ETFs saw huge outflows as the price of gold continued to drop. The SPDR Gold Shares (NYSE:GLD) shed about 20% of its value over the course of 2015. The iShares Gold Trust (NYSE:IAU) fared only slightly better, while the ETFS Physical Swiss Gold Shares (NYSE:SGOL) performed slightly worse.
With the Federal Reserve slated to make multiple rate increases during the course of 2016, this drag on the gold ETF market has not abated. However, the outlook for these ETFs has still shifted significantly. Since the new year began, a number of developments have again heightened the appeal of precious metals. Tensions have exploded between the two biggest players in the Middle East, Iran and Saudi Arabia, prompting the two nations to break off diplomatic ties; the rogue nation of North Korea seized the global stage by detonating what it claimed as a hydrogen bomb as a test; and the continued slowing of the Chinese economy sparked a massive decline for the country's stock market, setting off a global rout for equities.
While the worldwide pain for stock markets has played a role in redirecting investment into alternative assets (precious metals chief among them), the geopolitical firestorm across the Middle East and Asia has been the main driver of the rebound for metal prices and the funds linked to them.
Gold Mining ETFs
In addition to the bullion-backed ETFs, the funds that track the performance of a basket of major gold miners have also benefited greatly from the swift change in market sentiment. Earlier this week, the Sprott Gold Miners ETF (NYSE:SGDM) advanced 2.9%; it was followed higher by the iShares MSCI Global Gold Miners ETF (NYSE:RING) gaining 2.5%; and the smaller Market Vectors Gold Miners ETF (NYSE:GDX) rose by 2.1%.
Some experts believe the turnaround for the miners will be sustained. In a note to clients this week, UBS analysts made this projection regarding the precious metals: “In 2016, we expect gold and gold mines moving into an eight-year cycle bottom as the basis for the next multi-year bull market. Initially, we see gold profiting as a safe haven and as of 2017, gold could profit from the U.S. dollar moving in a major top and starting a bear market.”
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.