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Gold ETFs to Continue Their Bull Run: Here's Why?

Gold has been on investors’ radar since the start of the year given that the bullion has made a spectacular comeback after being shunned for three years. After hitting the 15-month high of $1,300 per ounce on May 2, the precious metal lost its momentum to trade around $1,275 per ounce currently. Notably, the yellow metal has risen about 20% so far this year.

Given this, many investors are concerned about the continuation of the bull run in gold. For them, we have highlighted some strong reasons to remain invested in gold and gold ETFs or buy on pullbacks:   

Global Worries

The global stock market has been flooded with bouts of volatility and uncertainty. This is especially true against the backdrop of the oil price drama and the China-led downturn. Though the Chinese economy showed some signs of a rebound in March, fears of a slowdown resurfaced with the latest round of downbeat data and rising debt. Additionally, the growth momentum in the U.S. has slowed down lately and investors’ faith in central banks’ ability to boost growth across the globe has faded (read: Profit from These ETFs if China Turmoil Continues).

Further, the International Monetary Fund (IMF) once again cut its global growth forecast to 3.2% from the earlier projection of 3.4%, citing that the ill effects of persistent slowdown in China and lower oil prices have spilled over into emerging markets such as Brazil. The agency also highlighted economic weakness in developed countries like Japan, Europe and the U.S. that could lead to poor stock performance across the globe.

Added to the woes is Britain's possible exit from the European Union and U.S. election in November that will continue to roil the global markets in the second half. The feeble macro environment will continue to raise demand for the yellow metal as a store of value and hedge against market turmoil.

Fed’s Cautious Stance

Given the global growth worries and increased market volatility, the Fed is not in a hurry to raise interest rates anytime soon. Though the greenback has shown some strength lately, lower interest rates will continue to weigh on the dollar against the basket of currencies raising the appeal for gold. Even if the Fed raises rates, it will follow a slower path and pull the rates higher to 0.875% from the current 0.500%. This is much lower than the December expectation of 1.375%.

Negative Interest Rates

Most central banks across the world such as Japan, Sweden, Switzerland, Denmark and Europe adopted negative interest rates in order to restore growth and ease fears of deflation. The strategy has raised concerns over the profitability of banks and increased their chances of default. This is because negative interest rates are discouraging investors to deposit their money in banks as this could eat away some fraction of their money initially, leaving them with less than what they had invested. This has boosted demand for gold bullion and pushed the prices higher. The trend is likely to persist throughout the year, as more countries will resort to this strategy to stimulate economic growth (read: Sector ETFs to Benefit from Global Negative Interest Rates).

Historical Underperformance of Stocks in Summer

As per the old adage “Sell in May and Go Away”, the U.S. stock market has a long history of weak performance during the summer months (May to October). According to the study from Bespoke, the S&P 500 delivered an average of just 0.85% gains from May to October in comparison to the average gains of 6.3% in the November–April period over the past 20 years. This seasonality might keep investors away from the stock market during the six-month period and encourage them to invest in the safe haven avenues like gold (read: 4 ETF Strategies that Deny "Sell in May and Go Away").
 
Bullish Gold Outlook
 
A number of experts and researchers believe that gold has the potential to move higher in the coming months. According to Gartman, the bullishness in the precious metal remains intact with 10–15% more returns from the current levels. If the gold breaches the $1,300 per ounce level, it will be as high as around $1,500 per ounce.
 
Investment banks such as JPMorgan, RBC Capital Markets and BNP Paribas expect gold to hit $1,400 per ounce this year. Further, hedge fund managers boosted their bullish bets on gold to the highest level since 2011, according to Bloomberg. In particular, Stanley Druckenmiller is bullish on gold and bearish on the stock market.

How to Play?

Given the huge optimism and intense buying pressure on gold, investors have a long list of options in the ETF world to tap the metal’s rally.

Gold ETFs

While there are many product that are directly linked to the spot gold price or futures, we have highlighted the three most popular ETFs. These have gained over 19% in the year-to-date timeframe and have a favorable Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook.

SPDR Gold Trust ETF (GLD):  This is the largest and most popular ETF in the gold space with AUM of $33.9 billion and average daily volume of around 9.6 million shares. The fund tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. Expense ratio comes in at 0.40% (read: Gold ETF Hits New 52-Week High).
 
iShares Gold Trust (IAU): This ETF offers exposure to the day-to-day movement of the price of gold bullion and is backed by physical gold under the custody of JP Morgan Chase Bank in London. It has AUM of $8 billion and trades in solid volume of more than 8 million shares a day on average. The ETF charges 25 bps in annual fees. 
 
ETFS Physical Swiss Gold Shares (SGOL): This product also tracks the price of gold bullion and is backed by physical bullion under the custody of JPMorgan Chase Bank. It has amassed $1.0 billion in its asset base and trades in lower volume of 41,000 shares per day. The product has an expense ratio of 0.39%.

Leveraged Gold ETFs

Investors who are bullish on gold may consider a near-term long on the precious metal with the following ETFs depending on their risk appetite.

ProShares Ultra Gold ETF (UGL):  This fund seeks to deliver twice (2x or 200%) the return of the daily performance of gold bullion in U.S. dollars. It charges 95 bps in fees a year and has amassed $95.4 million in its asset base. Volume is light at about 42,000 shares per day. The ETF has gained 39.9% so far this year.

PowerShares DB Gold Double Long ETN (DGP): This ETN seeks to deliver twice the return of the daily performance of the DBIQ Optimum Yield Gold Index Excess Return, charging 75 bps in fees per year. It has accumulated $137.1 million in its asset base so far and trades in an average daily volume of 75,000 shares. The ETN is up 47% this year (read: How to Trade in Gold ETFs After Robust 30-Year Rally?).
 
VelocityShares 3x Long Gold ETN (UGLD): This product provides three times (3x or 300%) exposure to the daily performance of the S&P GSCI Gold Index Excess Return plus returns from U.S. T-bills net of fees and expenses. The ETN has been able to manage an asset base of $86.4 million while charging a higher fee of 1.35% annually. However, the note trades in a solid volume of over 595,000 shares a day on average and has surged 63.4% in the year-to-date timeframe.
 
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SPDR-GOLD TRUST (GLD): ETF Research Reports
 
ISHARS-GOLD TR (IAU): ETF Research Reports
 
ETFS-GOLD TRUST (SGOL): ETF Research Reports
 
PRO-ULT GOLD (UGL): ETF Research Reports
 
DB GD 2XL (DGP): ETF Research Reports
 
VEL-3X LNG GOLD (UGLD): ETF Research Reports
 
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