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3 Reasons to Buy Gold ETFs Now

Sanghamitra Saha
Updated

Gold prices are glittering again thanks to a subdued greenback and political uncertainty. The largest gold ETF SPDR Gold Shares GLD has gained about 12% in the year-to-date frame (as of August 11, 2017) and was up about 5.8% in the last one month.

Now the metal’s futures for December delivery is on its course of hitting $1,300 an ounce again – the highest close for a most active contract since June 6. Let’s take a look at the factors that are pushing up gold and find out how long the rally can continue (read: Will Gold ETFs Shine in August?).

Trump-Kim Jong-un Tensions

President Donald Trump’s recent incendiary rhetoric on North Korea’s nuclear threat halted the market rally last week. Notably, the CBOE Volatility Index jumped the most in five weeks on August 8. The S&P 500 fell the most in the month (read: Time to Short U.S. Equities with ETFs?)

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Since gold is often viewed as a safe haven asset and hedge against market turmoil, this Trump- north Korea’s Kim Jong-un clash gave the yellow metal a chance to soar higher. Amid rising volatility, the world's largest hedge fund – Bridgewater – suggested to put about 5% to 10% of total assets in gold as a hedge.

Subdued U.S. Inflation

U.S. consumer prices rose 1.7% year over year in July 2017, falling shy of market expectations of 1.8% and following a 1.6% gain in June. This estimate miss made one thing sure that the Fed will not be in hurry to enact its third rate hike this year.

Following the missing of the inflation data, CME’s FedWatch showed that the odds of a rate hike in December fell to 36% from 54% a month ago. Weak economic data and political upheaval in Washington have kept U.S. dollar at check. Powershares DB US Dollar Index Bullish Fund UUP retreated over 2.6% in the last one month (as of August 11, 2017). Since the greenback and commodities like goldare inversely related, the metal got its great days back again.

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 tonnes on restocking by jewelers. Also, a good monsoon this year should have led to greater cultivation which in turn should boost demand for gold in rural areas during the upcoming festive season. Two-thirds of India's gold demand originates from rural areas, where jewelry is traditionally seen a store of wealth.

India is a key consumer of gold. Thus, retail demand in the two top gold consuming countries China and India often drive the metal’s prices. With the forthcoming wedding and festival season in India, gold prices will have another reason to run.

Dhanteras, the first day of the famous Indian 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.

In the first seven months of the 2017, Indian imports more than doubled to 550 tons from the year-ago period in apprehension of the new tax law GST. Under the GST norm, taxes on gold increased to 3% from 1.2% previously.

To beat GST, Indian consumers also looked to Dubai for buying gold and jewelry. Retailers in Dubai witnessed higher demand among Indian travelers. The trend can provide some boost to gold buying till Dubai enacts its own sales tax soon (read: India to Unify Tax: Near-Term Pain/Long-Term Gain for ETFs).

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 GLD, iShares Gold Trust IAU and ETFS Physical Swiss Gold SGOL.

For fatter returns, investors can also play leveraged products like VelocityShares 3x Long Gold ETN UGLD, DB Gold Double Long ETN DGP and ProShares Ultra Gold UGL . However, leveraged ETF plays involve greater risk.

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ETFS-GOLD TRUST (SGOL): ETF Research Reports
 
GOLD (LONDON P (GLD): ETF Research Reports
 
ISHARS-GOLD TR (IAU): ETF Research Reports
 
PRO-ULT GOLD (UGL): ETF Research Reports
 
PWRSH-DB US$ BU (UUP): ETF Research Reports
 
VEL-3X LNG GOLD (UGLD): ETF Research Reports
 
DB GD 2XL (DGP): ETF Research Reports
 
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