Factors Affecting Gold Stocks and ETFs: What You Need to Know

Gold is one of the most widely traded commodities, and market participants tend to look at this yellow precious metal as a safe haven. Now, if you’re looking to trade or invest in gold-related equity securities, you would want to take these factors into account because they tend to impact gold prices, and consequently, they would also affect gold stocks and gold ETFs.

The Federal Reserve and Monetary Policy

Now, interest rates tend to influence gold prices. When interest rates are low, it may be less attractive for investors to hold fixed-income securities and CDs, and they could generate nominal returns that are less than the rate of inflation. When this occurs, investors could actually lose money, despite having nominal gains. Therefore, in times of low interest rates, gold typically is a more attractive investment, even though the commodity yields 0%. However, gold stocks and gold ETFs could provide a better opportunity to gain exposure to gold prices because these securities could offer yields, as opposed to holding physical gold.

On the other hand, in a rising interest rate environment, or in times of high interest rates, fixed-income securities, such as Treasury bonds and corporate bonds, may be more attractive than gold. Consequently, you may see some outflows in gold ETFs and gold stocks in these environments.

Now, let’s get to the Federal Reserve. The Federal Reserve Bank controls the monetary policy, and therefore, it decides the level of interest rates. That in mind, the Federal Open Market Committee (FOMC) is one factor that traders would want to focus on. When the Federal Open Market Committee meets, market participants are focused on what the Fed says. If the FOMC raises rates in one of its meetings, you would most likely see gold prices fall. On the other hand, if the Fed leaves rates unchanged or cuts rates, you should see a rise in gold prices. Moreover, the language the Fed uses could also affect gold prices and gold stocks.

For example, in May 2017, the FOMC left rates unchanged. However, it indicated that the Fed could potentially raise rates in the June 2017 meeting. That in mind, as the meeting approached, the probability of a rate hike was above 99%. Now, the CME Group FedWatch Tool gives an idea of the probability of the Fed raising interest rates in its meetings, which is calculated using the 30-day Fed Funds futures prices and have been widely used in order to determine the market’s views on the changes in U.S. monetary policy.

Check out the CME Group FedWatch Tool.

fedwatch tool

Source: CME Group

Now, with the high expectations of the FOMC raising rates in its June meeting, gold prices have fallen. Take a look at the 30-minute chart on Gold Futures for delivery in June 2017.

gold futures

Source: TradingView

That said, the Fed carries a lot of weight on gold prices, and in turn, this would affect gold stocks.

Supply and Demand

Like all things in the markets, supply and demand affects the prices of gold and gold stocks. Now, it’s pretty hard to predict the level of supply and demand in gold, but you should focus on the overall outlook of the global economy to get an idea of whether demand may be rising or falling in the future. For example, if there’s a high degree of political uncertainty or low interest rates, there may be an increase in the demand for the yellow precious metal, and consequently, this should cause the prices of gold to rise, and since gold stocks and gold ETFs are exposed to gold, they should follow in the same direction.

Inflation Also Affects Gold Prices and Gold Stocks

Inflation is typically used as an indication of economic growth and whether the economy is expanding or contracting. Now, when inflation is rising, or if there is a high level of inflation, this tends to push gold prices higher, and therefore, gold stocks and ETFs should follow. On the other hand, when there is a low level of inflation. This tends to be true when the Fed leaves interest rates unchanged, as an increase in rates would affect increase the level of the U.S. dollar, which weighs on the U.S. dollar, but more on that later.

Typically, when the U.S. economy is expanding, the Fed may look to expand the money supply, and therefore, this would mean an increase in inflation, if the FOMC leaves rates unchanged, this should cause gold prices and gold stocks to rise. The opposite is true when inflation is falling, and the Fed leaves rates stagnant.

Gold ETFs and Gold Stocks

Now, as stated previously, gold stocks and gold ETFs tend to provide exposure to gold prices. That in mind, when gold prices rise, gold stocks rise. However, when gold prices fall, gold ETFs and gold-related stocks tend to fall. That said, gold ETFs and gold stocks may provide a cheaper alternative to investing in gold, which tends to be over $1,000 per troy ounce.

One of the most widely traded gold exchange-traded funds is the SPDR Gold Shares (NYSEARCA: GLD), which aims to track the performance of the price of gold bullion. Here’s a look at GLD on the 15-minute chart, as well as Gold futures prices.

gold futures 15 chart

Source: TradingView

Now, if you look at the chart, the candlesticks are the prices for GLD, while the line plot is of Gold futures prices. If you look closely, these two securities trade in a similar fashion.

Gold mining stocks, or gold miner stocks, are also exposed to prices of gold. When gold prices rise, gold miners could generate more revenues and earnings based on the spread between their costs and the selling price per ounce of gold, and vice versa. That in mind, gold miner stocks or gold miner ETFs could also serve as an alternative to physical gold or gold futures.

One of the most popular gold miners ETFs is the VanEck Vectors Gold Miners ETF (NYSEARCA: GDX) aims to replicate the general price and yield performance of the NYSE Arca Gold Miners Index, the fund’s underlying index. That in mind, if you’re looking for a cheaper alternative to gold or GLD, you might consider GDX, which tracks gold stocks.

Check out the comparison price chart of gold futures and GDX.

gold futures gdx

Source: TradingView

The Bottom Line

If you’re looking to trade gold stocks and gold ETFs, you’ll want to focus on these factors that affect gold prices. Now, keep in mind, that these aren’t the only factors affecting gold prices, they’re just some of the primary ones that could affect gold prices, gold stocks and ETFs, and other gold-related securities.



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