China and India – once key buyers of gold – are now seeing a plunge in demand, taking global requirement to its lowest level in seven years. Prices remained high on safe-haven bid, especially emanating from North Korea. This is what dealers in India believe buyers are being discouraged by.
Against this backdrop, many may think gold investing is not a good bet right now. But there are several factors that belie the belief and make gold ETFs intriguing picks for the near term.
Higher Demand from ETF = Investment Demand
While in 2016, global gold jewelry purchases fell more than 23% from 2014, ETFs stacked gold hugely. The year 2016 saw the second-largest buildup of gold by ETFs in a calendar year, behind only 2009, despite rising real interest rates.
North Korea is Gold’s Friend
U.S. President Donald Trump’s incendiary rhetoric on North Korea’s nuclear threat can go a long way in restoring gold prices. In any case, several global leaders including Trump have long been quite vocal against North Korea’s antagonistic activities.
Following North Korea’s most powerful nuclear test on Sep 3, the 15-member Security Council voted on a U.S.-drafted resolution and slammed the rogue nation with a new round of sanctions on Sep 18. This has prohibited North Korea’s key textile exports and restricted fuel supplies. Former North Korea’s partners Russia and China also supported the new oil imports limits.
The relation between Trump and North Korea soured so much that North Korea’s foreign minister indicated on Monday that a weekend tweet by Trump has been considered “as a declaration of war on North Korea” and that Pyongyang will not step behind to take counter actions, as per Reuters. If this was not enough, it is reported that North Korea has been fortifying defense on its east coast after U.S. Air Force B-1B bombers were flown to the Korean peninsula.
Since gold is often viewed as a safe-haven asset and hedge against market turmoil, this North Korea tension can give the yellow metal a chance to soar sky-high. Amid rising volatility, the world’s largest hedge fund, Bridgewater, recently suggested to put about 5% to 10% of total assets in gold as a hedge.
Rising Inflation
While rising U.S. inflation and the resultant hike in rates as well as the ascension in greenback may hamper gold prices, investors should note that gold is commonly viewed as an inflation-protected asset. So, if the greenback remains low on mixed economic data points and geopolitical risks stay strong thanks to North Korea’s nuke threats, an increase in inflation can favor gold investing.
Upcoming Festive Season in India
As per an article published on Reuters, India’s gold imports are likely to go up by a third in 2017 to 750 tons on restocking by jewelers. Despite low demand, trading houses imported gold rampantly in the last few weeks. As prices have risen, importers are now trying to sell the metal at a discount and yet remain profitable.
India’s gold imports in August almost tripled year over year “as a recent tax change that allowed importers to ship it from South Korea without paying customs duty saw some traders purchasing heavily from the country” as per the source.
With the forthcoming wedding and festive season in India, gold prices will have another reason to run. Dhanteras, the first day of the famous festival Diwali, is in mid-October this year. The occasion is marked by huge gold purchases. All these reasons are leading jewelers to stock the metal.
Bottom Line
As of now, the metal seems due for a rally. So, investors intending to profit out of the new-found optimism in the gold space may consider gold ETFs like the SPDR Gold Trust ETF (NYSEARCA:GLD), iShares Gold Trust (NYSEARCA:IAU) and ETFS Physical Swiss Gold Trust (NYSEARCA:SGOL).
For fatter returns, investors can also play leveraged products like VelocityShares 3x Long Gold ETN (NASDAQ:UGLD), DB Gold Double Long ETN (NYSEARCA:DGP) and ProShares Ultra Gold (NYSEARCA:UGL). However, leveraged ETF plays involve greater risk.
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