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How Well Will Gold Mining ETFs Weather A Rate Hike?

In the third quarter of 2015, gold demand for investment purposes – bars, coins and ETFs – increased 27% year on year to 229.7 tons, the highest third-quarter total since 2012. Overall, in the quarter, ETFs witnessed an outflow of 65.9 tons. However, breaking down on a monthly basis, outflows of 71.8 tons in July were partly offset by inflows in the two successive months. Till October, ETFs witnessed an inflow on positive institutional investor attitudes.

Compared to the previous year, longer-term outflows from ETFs have slowed down considerably. Till this October, ETF holdings were down by just 54 tons compared with declines of 780 tons in 2013 and 133 tons in 2014.

However, at present, gold bullion and related exchange traded funds are stuck in a rut, with the precious metal trading around six-year lows amid speculation the Federal Reserve is preparing to raise interest rates, which has pushed the dollar higher. Higher interest rates would diminish gold’s attractiveness as the precious metal does not pay interest like fixed-income assets.

Federal Reserve Chair Janet Yellen’s speech on Dec 2 signaled that the Fed is set to raise interest rates this month for the first time in nearly a decade. So far this year, the economy has added a healthy average of 206,000 jobs a month and the unemployment rate has fallen to a near-normal 5%.  Though job growth weakened to 145,000 in August and September, Yellen stated that a strong 271,000 in October lifted the monthly average since June to a vigorous 195,000.

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