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Can Gold ETFs Continue To Shine?

June 19th, 2014

gold etf logoSweta Killa: After a lackluster 2013, gold is performing remarkably well this year. Most of the gains can be attributed to weak equity markets, momentum sell-off, uneven economic growth, firming dollar and the Ukraine crisis. Now, escalating violence in Iraq is boosting the appeal for the safe haven across the board.

In fact, the gold bullion climbed 6% in the year-to-date time frame and is easily outperforming the broad markets when compared to the 4.8% gain for the S&P 500, 3.5% for Nasdaq, 1.2% gain for Dow Jones and 0.08% for FTSE. This trend is likely to continue this year given rising demand and geopolitical tensions.

Global Demand Dynamics

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Global demand for gold in the first quarter remained steady as rising jewelry purchase was offset by weakening demand for gold bars and coins. Jewelry demand reached the highest level since 2005 on increased purchases in China (read: Will the China Stimulus Boost Copper ETFs This Quarter?).

The demand for yellow metal is likely to pick up in world’s two largest consuming nations – China and India. This is especially true as the new Indian government is expected to ease curbs on gold exports that would allow private trading companies to bring the precious metal into the country. Easing of restrictions would propel the demand for the yellow metal higher.

Additionally, the World Gold Council expects gold demand in China to rise about 20% over the next few years.

Global Trends

The global economy is currently seeing risks arising from geopolitical tensions in Ukraine and Iraq that are heavily weighing on the global equity markets but are supporting gold prices.

Iraq is facing the threat of civil war and a possible fragmentation if the violence by the Sunni rebels in the nation escalates. This is because the Sunni Islamist militants, led by the Islamic State of Iraq and Syria (ISIS), have captured the three major northern Iraqi cities – Mosul, Tikrit, and Baiji – solidifying their grip on the north. The extremists are now advancing toward the capital city of Baghdad.

Meanwhile, tensions in Russia have intensified as the country has cut natural gas supply to Ukraine after failing to reach a new deal for payments amid continued fighting in eastern Ukraine.

The instability in both nations will continue to fuel rally in gold prices and the related ETFs at least in the near term. Given this, investors could consider the gold ETFs in order to take advantage of the recent surge. While there are several unleveraged options to play gold, we have highlighted the four popular products in the space.

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NYSE:AGOL, NYSE:GLD, NYSE:IAU, NYSE:SGOL, NYSE:SLV


 

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