Maybe Another Buying Opportunity With Gold ETFs

The SPDR Gold Trust (ETF) GLD, the world's largest exchange-traded fund backed by physical holdings of gold, has tumbled in the past two trading sessions as investors have embraced riskier assets, but two days of ebullience for equities does not guarantee a lasting trend.

A volatile start to 2016 for global equity markets has sent investors looking for safe-haven alternatives, and that search is benefiting gold exchange-traded products. It is safe-haven demand propping up gold and ETFs like GLD amid tepid demand from China and India, the world's two largest gold-consuming nations.

Finding Safe-Haven In Gold

For gold bugs, there is nothing wrong with safe-haven demand and 2016's market action is, to this pointing, reminding investors of gold's utility. In fact, gold has proven its mettle (no pun intended) during market crises ranging from the Soviet sovereign debt crisis to the Long Term Capital Management meltdown to the global financial crisis.

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As State Street pointed out, gold was either the best or second-best asset in seven memorable crises, including the aforementioned.

“By delivering competitive returns during a number of historically challenging times in the market, gold has provided investors with a source of wealth preservation and a means of moderating the market's volatility,” said State Street Vice President David Mazza in a recent note.

Gold is also benefiting from declining Treasury yields because higher interest rates are believed to diminish gold's allure. That much was on display as gold and GLD tumbled the past two years as investors anticipated the Federal Reserve boosting borrowing costs. Gold shows only modest correlations to U.S. Treasurys and the Barclays Aggregate Bond Index.

“Adding a strategic allocation to gold within a diversified portfolio can offer a number of potential benefits, including acting as a potential hedge against stock market volatility, and potentially improving diversification given its low correlation with traditional asset classes and other commodities,” added Mazza.

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