Are SPDR Gold Shares About To Rise?

April 19, 2017

SPDR gold (GLD) shares are currently trading at $122.14 per share. On Thursday (13 April 2017), the price of precious metals rose sharply after US President Donald Trump took a swipe at the USD, saying that it was trading too strong. The US Dollar Index has retreated from a high of around 101.30 on 9 April to its current level of 100.53 on Thursday, 13 April. The price of gold is inversely correlated to the level of the US dollar index. When the DXY is rising, this results in an appreciating USD and a depreciating gold price. After Trump’s comments, the DXY plunged to just over 100 between Wednesday and Thursday. This was enough to build significant momentum with gold bulls who plowed into the precious metal with call options.

The US President was speaking to reporters at the Wall Street Journal, and voicing his concerns that the greenback was too strong. Trump also expressed concern about interest rates, and preferred that the Fed maintain interest rates at a low level. Interest rates, the USD and gold are closely connected in that rising interest rates strengthen the USD which then weakens the gold price. Gold is a non-interest-bearing asset which suffers when rates rise. Additionally, foreign buyers of the precious metal are disadvantaged when the dollar strengthens since gold is a dollar-denominated asset. This means that more foreign currency is required to purchase the equivalent ounce of gold in USD.

Geopolitical Tensions Running High And USD Is Playing Into The hands Of Gold Bugs

On Wednesday, 12 April, gold traded at $1,278.10 per ounce, marking its best performance since November 7, 2016. That was the day before the US presidential election when Trump’s upset victory stunned the financial markets. Gold recently broke above its 200-day MA price of $1,260.49, and analysts are forecasting upside momentum for the precious metal. There is tremendous hullabaloo in the political arena across Europe. The rise of nationalist parties in France (Le Pen) is causing significant uncertainty for the EUR. Additionally, Brexit concerns remain a reality for the United Kingdom, although the 2-year window has given the GBP some breathing space.

Whenever there is geopolitical uncertainty, gold benefits. It is also considered a hedge against equities markets volatility, and this is especially evident when a risk-off approach is adopted. Those who are trading gold are well aware of the risks entailed. Gold is driven by speculative sentiment. The world’s biggest fund SPDR is a good indicator of which way speculators are moving with gold. We recently saw significant tensions in Syria and North Korea, and these tensions have fueled the price rise in gold. That the precious metal has been rising for several months is indicative of macroeconomic instability.

Forget Conventional Wisdom: Gold Prices Are Determined By Real Interest Rates

Gold investors have been disappointed by the three Fed rate hikes since December 2015. The price flounders whenever the Fed adopts monetary tightening measures. However, an additional 2 rate hikes are expected by the Fed before the year’s end. This will bring the federal funds rate within earshot of 1.50%, all else being equal. Rising interest rates bolster the greenback and weaken foreign currencies. This coupled with fiscal expansion could be bad news for gold. Surprisingly, the gold price has not reacted as expected given the Fed rate increases.

Gold has been rising alongside increasing interest rates. Consequently, this goes against conventional thinking. It should be borne in mind that the correlation is less pronounced than the theory suggests. Nominal interest rates are not the measure to focus on, the key issue is real interest rates. That measure is the real determinant of how gold prices are going to move. If inflation rises, but interest rates rise less than that, the real interest rate is decreasing…which is precisely why gold is rising.

Luis Aureliano is a business writer and financial analyst. With over 15 years of experience in global finance and an MBA in economics and management, Luis’s areas of expertise include business, marketing, communications, personal finance, macro economics, stocks and emerging markets.

A medical study in France during the early twentieth century suggests that gold is an effective treatment for rheumatoid arthritis.

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