The Luster On Gold ETFs Is Still Intact

Major gold-backed exchange traded products, such as the SPDR Gold Shares GLD and the iShares Gold Trust IAU, are sporting solid year-to-date showings. Some market observers, however, are voicing concerns about the yellow metal after it declined during the volatility spike earlier this month.

Gold's lack of positive response to the surge in the CBOE Volatility Index, also known as the VIX, vexed investors and led some to question the precious metal's safe-haven status.

“With the CBOE Volatility Index reaching as high as 37 over the last two weeks, a level not seen since August 2015, it was agreed upon that fear had reentered the market,” said CFRA Research analyst Lindsey Bell in a note last week. “However, the price of gold, which is often considered a safe haven asset in times of uncertainty, declined just over 3 percent from its recent high on Jan. 25 through last Friday.”

Remaining Steady

Although gold disappointed a bit earlier this month, GLD and IAU are still up 3.5 percent this year and spot gold prices have remained above the technically important $1,300 per ounce level.

“There are several outside factors that affect the direction of gold, which has steadily remained above the $1300 level since the start of 2018,” said Bell. “In actuality, the VIX has a low correlation to the direction of gold. The dollar on the other hand, has a significant correlation with gold prices. Inflation and interest rates also have an impact. The US Dollar Index is currently about 7 percent lower than its average price in 2017, while gold has appreciated by 5 percent over its average price in 2017.”

The PowerShares DB US Dollar Index Bullish Fund UUP, which tracks the dollar's performance against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc, is down 3.1 percent this year.

An Inflation Hedge

Rising inflation could be a catalyst for GLD, IAU and rival gold ETFs because the yellow metal is historically a favored hedge against rising consumer prices.

“Gold has a negative correlation of 48 with the dollar, explaining the opposite moves. Inflation has a negative 17 correlation and the Federal Funds rate has a negative correlation of 57,” said Bell. “In other words, most simply put, the best environment to own gold is one in which the dollar, inflation and interest rates are declining.”

“The January reading on consumer prices released on Wednesday showed prices rose more than expected, up 0.5 percent versus the 0.3 percent expectation,” reports Reuters. “The core reading rose 0.3 percent against the 0.2 percent forecast. Both numbers increased from the 0.2 percent reading for December.”

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Disclosure: The author owns shares of IAU.