Gold and gold ETFs surge
As we discussed in More Upside? Fed’s Dovish Stance Boosts Gold to a Six-Year High, gold futures registered their single largest one-day jump of 2.8% on June 20 following the Fed’s dovish stance at its June meeting. While the Fed kept rates unchanged, it hinted at future rate cuts if the conditions warrant them, which sent gold prices soaring. The SPDR Gold Shares (GLD), which is the largest gold-backed ETF, has gained 6.3% in June alone. The VanEck Vectors Gold Miners ETF (GDX), which is a levered bet on gold prices, has returned 16% in the same period. Investors who have bet on even more leveraged ETFs, such as the Direxion Daily Gold Miners Index Bull 3X Shares (NUGT) and the Direxion Daily Junior Gold Miners Index Bull 3X Shares (JNUG) have made a killing. Since the start of June, they have returned a whopping 52.7% and 50.5%, respectively.
Gold surpasses $1,400
Gold doesn’t yield anything in terms of regular income, and higher interest rates make it difficult for the metal to compete with income-generating assets. When interest rates decline, investors prefer gold. Today, in Asian trading, gold prices broke above the psychologically important $1,400 per ounce level. This is the first time since September 2013 that the metal has surpassed this key level.
Factors supporting gold
There was not one but many factors supporting gold. The heightened geopolitical tensions, including the attack on a US drone by Iran and then a military threat by the US, only added to the escalating concerns. In addition, central banks all over the world over are grappling with economic weakness and have been indicating stimulus measures if it gets any worse. One very important factor that is supporting gold is the weakening outlook for the US dollar (UUP). A lower rate outlook is negative for the dollar as it lowers its attractiveness to foreign investors. A weak dollar, on the other hand, is positive for gold, as the metal is denominated in the dollar.
Read A Perfect Storm for Gold: All Macro Drivers Align for a more detailed discussion of the macro drivers that are helping gold prices.