After a rather disappointing 2015, gold has been a very shiny investment lately. The global economic slowdown and plethora of disappointing data has many investors concerned that we’re finally on the verge of a major bearish correction. Since the beginning of 2016, gold has shot up from under $1,100 per ounce to above $1,225 per ounce – more than 11% in six weeks.
The activity in gold prices follows what we’re seeing in gold exchange-traded funds (ETFs) too. These ETFs are seeing a rise in value, volume, and long positions, suggesting that investors are finally starting to pull away from the U.S. dollar as the safe-haven asset of choice and towards the more traditional choice – gold.
Gold Is Making a Comeback and ETFs Are Leading the Charge
A look at the performance of the SPDR Gold Shares ETF (GLD) shows us exactly how investors have been responding to gold’s recent activity. After falling to an annual low of around $100 in early December, the fund has taken off this month. It’s now at a new 52-week high, hovering around $117 per share.
Part of the ETF’s newly found success stems from the bearish outlook of the Chinese economy. After a year of mixed economic data leading to an apathetic market, investors seem to have finally begun to take on a more bearish appraisal of the global economy. Indian demand for gold could be another factor, with Indian gold prices rising over 15% year-to-date.
Volatility in the market this year has also led to more investors turning to gold rather than the U.S. dollar. The S&P 500 is down nearly 5% so far this year, which could explain gold’s sudden popularity. There’s a strong reverse correlation between equity prices and gold values.
Based on the latest volumes we’re seeing in gold ETFs, investors are definitely clamoring for a conservative asset to weather the current economic storm. Just a quick peek at the volumes of GLD reveals a significant increase in investor activity. And it’s not just pure play gold ETFs that are gaining right now – gold mining ETFs are also seeing higher volumes.
The Market Vectors Gold Miners ETF (GDX) saw capital volume averaging $1.2 billion per day in 2016 – a considerable increase from August 2015’s $900 million. Including GDX, four other gold ETFs count themselves among the top 10 nonleveraged ETFs this year. Lower gas prices have also helped gold mining companies, whose lower cost of production means higher margins and higher earnings.
The Bottom Line
The long-term fallout from incredibly low oil prices has helped turn investors back to gold. While both gold and oil are U.S. dollar-denominated assets, the rise of the dollar is contributing to oil’s current weakness whereas gold’s rise is mainly being supported by a flight to safety. As the global economy continues to struggle, it’s possible that gold will gain even more throughout the year. If ETF volumes are any indicator, investors are pouring into the precious metal any way they can.
