Gold ETFs are today the primary gauge that most traders and speculators use for determining the direction and momentum of the gold market. Although these exchange-traded funds often track directly with the COMEX gold price, it's worth noting that they offer some greater semblance of matching the physical gold market because several gold ETFs are actually backed by real stockpiles of bullion.
A brief look at the gold ETF market gives us some insight into investor sentiment regarding the precious metals.
Return of the Safe Haven
The start of 2016 has been devastating for equities around the globe. The markets have responded sharply to the various developments that are dragging on the pace of growth in the world economy. In fact, growth projections have been falling across the board since the beginning of last year. In some economic regions, like Russia for instance, economic contraction is even a distinct possibility. Elsewhere, even in bellwether economies like China and the United States, GDP growth is expected to fall from earlier predictions. In fact, China is poised for its weakest growth in a quarter-century as the People's Republic makes the difficult transition from a production-based economy to one primarily based in the service industry (as is the case in the U.S.).
Couple these universally weak growth prospects with a variety of geopolitical tensions (war in Iraq-Syria, tensions between Iran and Saudi Arabia) and the near-collapse of the price of crude oil, and the observer can hardly question why investors are pulling their money out of traditional investments (like stocks and bonds) and opting for alternative assets (like precious metals) instead. In 2015, China saw capital outflows of $750 billion from the country, and this has only accelerated in 2016 with the country's main stock index, the Shanghai Composite, losing nearly 20% year-to-date.
In general, these developments are positive for gold prices, particularly following a prolonged period of uncertainty on the markets.
Investment Returns to Gold ETFs
Over the previous two years, the premier gold-backed fund, the SPDR Gold Shares ETF (NYSE:GLD) has seen a total of $5.5 billion in net outflows as investors soured on the fund due to consistently falling metal prices. The trend has reversed, at least for the moment, in 2016. GLD was up 4.4% at one point this year, reflecting net positive inflows of capital that have increased the fund's stockpile of gold.
GLD has benefited from increased volatility in equities to start the year. The gyrations of the stock markets have understandably caused investors to lose faith in putting their money into these assets.
The footing has been a bit more uneven for the gold miners. Gold mining ETFs like the Market Vectors Gold Miners ETF (NYSE:GDX) saw a nice bump in the first week of January, but faded in the following week despite continued mayhem in equities. The main difference is that stronger metal prices, although helpful for mining companies, doesn't outweigh the drag created by the dismal performance of the broader commodities market. Markit explains, “While the rise in gold price is positive for the industry, some US based or operating mines will need higher price increases magnitudes to improve their prospects and offset the impact of a stronger local currency.”
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.