The gold bull rally appears to be over in 2016 as investors exit their positions to realize their gains in gold. Corporate gold equities which increased in value 5 times faster than the gains made by gold commodity prices appear set for a decline. There appears to be divestment from corporate gold equities, and investment into, albeit at a lower rate than before, into the physical gold commodity through gold ETFs.
Soros Fund Management LLC, an American hedge fund management firm, severely reduced its holding in SPDR Gold Trust and the Barrick Gold Corp to realize gains. The fund reduced its holding in SPDR Gold Trust, the world’s biggest exchange-traded fund, by 77 percent to only 240,000 shares from 1.05 million shares. On a similar scale, shares in Barrick Gold Corp. were divested from 19.4 million shares to 1.07 million shares.
Jana Partners, an investment firm in the U.S., also dissolved its holding of 50,000 shares in SPDR Gold Trust in the second quarter. The investment firm had made an investment in gold as it saw the spot gold prices at their best quarterly performance in nearly three decades in first half of 2016.
Many funds still prefer to hold onto some bullion backed ETFs, shares in the actual metal commodity, for hedging purposes due to the recent global economic conditions with bonds paying negative yields. The lack luster desire for owning overvalued corporate gold equities is on a general trend downwards, and a potential interest rate increase would also negatively impact the value of equities due to their increased cost of doing business as interest rates potentially climb.
For investors seeking to short gold or hold gold ETFs back by the physical commodity, it would be worthwhile to explore ETFs in ETFHeatMap screener such as:
• GLL – Pro Shares UltraShort Gold ETF Short 2X
• DGLD – VelocityShares 3X Inverse Gold ETN
• GLD – SPDR Gold Trust (ETF)
On the cultural consumer front, weaker demand in India was on account of weaker currency, whereas the slump in oil prices exacerbated the demand in the Middle East. Even China faced fallen demand due to uncertain economic climate. Similar trend by also been observed in the US, with major funds dissolving their investments in bullion, thereby realizing their gains. The Brexit vote also had an impact on gold prices as uncertainty engulfed around the globe. The pound sterling devalued and investors shifted towards gold pushing up prices in June. The Federal Reserve has discussed about plans for an interest rate hike in the U.S, which has sparked a lot of resentment amongst the labor activists. The Fed officials have raised concerns over keeping the interest rates low could stoke inflation. The business fixed investment has shown a decline which worried the Fed officials. “One of the key goals should be that we don’t have another recession,” said Boston Fed President Eric Rosengren.
An interest rate hike would have an impact on bullion prices. The money managers would divert their portfolios away from gold in case interest rates increase. This can pull the bullion prices further down, making it an unattractive option.
“If the Fed starts raising rates and gold prices pull back, then the more levered names who have been the big out-performers will probably come down the most,” said Dan Denbow, a portfolio manager at the $870 million USAA Precious Metals & Minerals Fund in San Antonio.
In conclusion, the future outlook of gold as sound investment appears to be uncertain. The world’s leaders in jewelry demand from India, China, and the Middle East have taken a break, and gold equities may further lose its demand amidst a possible interest rate hike in the near future.