How To Treat Gold ETFs Right Now

Broadly speaking, gold exchange traded funds have been popular this year. The SPDR Gold Shares GLD and the iShares Gold Trust IAU have added over $2.8 billion in new assets on a combined basis since the start of 2017.

Since the start of the fourth quarter, gold ETFs have traded slightly and while fourth-quarter declines of about 1 percent for GLD and IAU are not alarming, gold's recent price action could be a sign that investors may want to consider adjusting their bullion allocations.

That could be good advice ahead of the December Federal Reserve meeting. The U.S. central bank is widely expected to raise interest rates. Part of gold's allure in recent years has been low interest rates throughout the developed world. Gold ETFs, such as GLD and IAU, do not pay dividends or interest, meaning they are more attractive to investors as interest rates remain low.

Dollar Impact

As is the case with other commodities, gold is denominated in U.S. dollars, meaning a struggling greenback can lift the yellow metal. Indeed, the dollar has been one of this year's worst-performing major currencies, but that could change, making bullion vulnerable in the process.

“One reason gold has done as well as it has year-to-date is weakness in the dollar,” said BlackRock in a recent note. “The U.S. Dollar (DXY) Index is down more than 9 percent from its early January high. More recently, however, the dollar has been firmer as investors have repositioned for a slightly more aggressive Federal Reserve (see the accompanying chart). In the near term I would expect a steadier dollar, particularly if the proposed tax cuts pass. A firm dollar removes another support for gold.” 

The U.S. Dollar Index is higher by about 1 percent over the past month.

Near-Term Headwinds

Right now probably is not the ideal time for investors to be adding to gold positions, but that does not mean the yellow metal and the related ETFs should be abandoned, either.

“For most investors, this means somewhere in the mid to single digits, as a percentage of their asset allocation,” said BlackRock. “But it’s important to note, while the near-term environment for gold is not ideal, there are still good reasons to maintain some exposure, including the diversification benefits. With the exception of long-dated U.S. bonds, gold continues to be one of the more diversifying asset classes.”

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