Gold ETFs Dip on Swiss Vote, Will India Save the Yellow Metal? - ETF News And Commentary

The year has been extremely tough for the gold bullion with all global economic data releases going against the yellow metal. The metal slipped below $1,200/oz at the end of October and is presently hovering around $1,150/oz thanks to mainly the seven-year high greenback price (read: 3 Frightening ETFs to Watch After Halloween).

An economic recovery in the U.S. which helped the Fed to seal the fate of the QE program and push the bank toward the first rate hike after eight years plus a sluggish global economy resulted in the slump in commodities price. This coupled with deflationary fears raging across several developed economies including the Eurozone, Japan and China marred the appeal of gold investing.

Notably, the yellow metal is often viewed as a hedge against market risk and inflation. Global deflationary fears emerged from a low growth scenario and multi-year low oil prices that took a toll on this metal. Moreover, geo-political concerns that flared up in the early part of the year also eased, putting the gold bullion at risk.

If this was not enough, an unsuccessful Swiss referendum which ruled out the suggestion of boosting gold reserves, was the final nail in the coffin. Notably, the proponents of “Save Our Swiss Gold” have lately put some pressure on the Swiss National Bank (SNB) to ramp up its bullion position to at least 20% of total assets from the current 8%. However, the proposal received a ‘NO', thereby saving SNB from shelling out about $56.3 billion (read: Will Gold ETFs Be Salvaged by the Upcoming Swiss Vote?).

Easing of India's Gold Import Rules

Amid the aforementioned headwinds, the gold bullion completely ignored the good news coming from the second largest gold consuming nation in the world – India. On November 28, India withdrew the 80:20 rule in gold imposed in August 2013. The directive was to re-export one-fifth (20%) of all the precious metal imported.

The rule was enacted to reign in depreciation of the Indian currency and widening of the current account deficit (CAD). Now that the CAD condition is not a cause of concern for India, the government decided in favor of the move. Some analysts believe that increasing instances of smuggling thanks to the 80:20 rule prompted the government to scrap the rule.  However, the government has maintained the 10% gold import duty.

Market Impact

Despite the easing and the potential pickup in gold usage in India with the onset of the wedding season, the gold bullion continued to be bearish on November 28. Basically, the news of the Swiss referendum and the easing of norms in India came in at the same time and investors appear to be paying more attention to the former.

As a result, SPDR Gold Trust ETF (GLD) lost about 2.6% on November 28. iShares Gold Trust (IAU) was also down 2.7%. The pain was more acute in the miners' space.  Investors should note that gold mining products generally trade as a leveraged play on underlying commodities. So when gold prices rise, these mining ETFs emerge as true winners and vice versa, which unfortunately has been the case lately.

Market Vectors Gold Miners ETF (GDX) was down 8.7% on November 28 while Market Vectors Junior Gold Miners ETF (GDXJ) retreated as much as 12%.  iShares MSCI Global Gold Miners ETF (RING), Gold Explorers ETF (GLDX), Global Gold and Precious Metals Portfolio (PSAU), and  Gold Miners ETF (SGDM) have lost in the 6.2% to 9.3% range on the day (read: Are Gold Mining ETFs in Danger of Year-to-Date Losses?).

Is There a Ray of Hope?

Investors would be surprised to know that the day after the referendum, the gold bullion posted the biggest daily gain this year as multi-year low oil prices bounced back on the apprehension of shrinking shale oil production, excessive sell-off in oil and a weaker dollar.  

As a result, GLD and IAU spiked about 4% on December 1. GDX, as expected, has gained more at 7.4% and GDXJ has added about 9.8%, although gold funds including the mining ETFs were down after hours.

Investors should note that the space is highly volatile now. Each and every economic release will regulate the metal's future movement. GLD and IAU presently have a Zacks ETF Rank #4 (Sell).
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