ETFs that offer exposure to gold are expected to face headwinds in the coming months, as a number of factors look set to put pressure on the gold price in the near term, according to a new research note from VanEck.
US economic strength, US tax reforms and Fed rate hikes are all expected to cause headwinds for the gold price in the near-term.
While the gold price remained relatively steady during October, ending the month down 0.7% at $1,271 per ounce, the report’s author, Joe Foster, portfolio manager at VanEck, outlines the issues he believes will impact the gold price in the near-term.
Firstly, according to data released in October, the US economy appears to be gaining momentum. “If this continues, gold will likely remain under pressure,” said Foster. “However, since the financial crisis, economic growth has been inconsistent and below historic norms. This, along with our belief that this is a late-cycle economy, suggests we are due for some disappointments in the economy.”
Secondly, according to Foster, gold may also be negatively impacted if proposed tax reforms are signed into law in the US. President Trump has a good deal of political capital riding on the legislation after failing to repeal Obamacare earlier in the year. However, Foster notes that the reforms are far from a done deal and “given the past performance of Washington, infighting among Republicans could result in limited reforms.”
Lastly, the Federal Reserve is widely expected to raise rates when it meets next month, marking the third year in a row in which the markets are anticipating a December increase. “We have noticed a pattern where gold becomes oversold leading into the rate increase and rallies in the following months,” said Foster. During the last two months of 2015 and 2016, gold declined 7.1% and 9.8% respectively. However, this was followed by gains of 16.7% and 8.3% in the first two months of 2016 and 2017.
While these headwinds may weigh on gold specifically in the short term, Foster notes that they also carry broader economic and financial risks that could potentially be gold supportive over longer time horizons and, as such, VanEck expects gold to hold within the $1,200 to $1,350 range.
Gold ETFs have seen mixed performance of late. The largest physically replicated gold ETF listed in Europe, the ETFS Physical Gold (PHAU LN) has returned 6.4% in the 12 months to 22 November but is some way off its recent highs in September.
VanEck offers a modified play on gold through their VanEck Vectors Gold Miners UCITS ETF (GDX LN). The fund tracks a basket of gold mining companies and, as such, offers a degree of derived gold price exposure while also providing investors with the potential for dividends as well as eliminating costs associated with storage of the metal itself.
GDX was launched in March 2015 and currently has assets of $116m with a total expense ratio of 0.53%. While hardly small in size, the fund has not yet matched the runaway success of its US counterpart, the VanEck Vectors Gold Miners ETF (GDX US) which has amassed $8.2bn in AUM since its launch in 2006.