Gold ETFs Face Fed-Induced Headwinds

Gold bullion and mining ETFs have been on fire this year as investors have returned to a beaten down asset class that may offer diversification and security from equity volatility.

At the beginning of the year, value-seeking traders were hungry to step back into gold as a contrarian turnaround play that was boosted by a January drop in stocks.

However, traders are starting to see the first cracks in the gold market that will test the resolve of bulls going forward.

The SPDR Gold Shares ETF GLD and Market Vectors Gold Miners ETF GDX are two of the most closely tracked funds in this space that peaked in mid-March, but have been steadily losing ground over the last two weeks.

GLD tracks the daily spot price of gold bullion, while GDX is a diversified basket of 40 global companies engaged in gold mining and exploration. Each of these ETFs allows you to access a specific segment of the gold market according to your preference of commodity or equity-related holdings.

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Since hitting a peak this month, GLD has declined more than five percent on a closing basis, while GDX has lost more than 12 percent of its value. One of the biggest catalysts for this most recent drop was the release of the Federal Reserve meeting minutes that solidified their commitment to reducing asset purchases and forecasting a timeline for rate increases.

Investors in the yellow metal may be spooked that gold will return to 2013-style price declines in the face of rising interest rates and low inflationary prospects.

On the flip side, gold demand in Asia appears to be strong as Bloomberg reported that that imports to China rose in February as more banks sought to import the precious metal. Long-term buyers may be looking to increase their holdings at advantageous prices and to meet demand for retail consumers.

Gold could also see another boost if equity volatility once again ramps up and traders go fleeing from stocks.

Ultimately this tug of war will be interesting to watch as additional guidance from the Federal Reserve, asset flows, and global demand statistics continue to develop this year.