Gold ETFs Lacking Bullish Catalysts
The gold bugs received some dire news this week as the two largest consumers of the precious metal announced a significant decline in second quarter purchases.
China cut its gold purchases by about 50 percent from a year ago, while India cut their purchases by nearly 40 percent. This is significant because the two countries together account for more than 70 percent of the global demand for gold.
In the past unstable geopolitical landscapes similar to today have been a positive catalyst for gold, as it was perceived a safe haven investment. Investors appear to be betting that political tension in the Middle East and Ukraine will not escalate much further.
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A strong U.S. dollar is also responsible for a fall in the value of gold. Historically gold and the U.S dollar move inversely to each other. This is due to gold being priced in U.S. dollars; when the value of the currency increases, the metal becomes more expensive for foreign purchasers.
SPDR Gold Trust (ETF) (NYSE: GLD)
The SPDR Gold Trust ETF is the largest gold ETF and one of the largest ETFs in the market. The ETF tracks the futures price of gold. The index is down 25 percent over the last three years as well as 7 percent over the last 12 months, and is also down 10 percent over the last six months.
The losses are not astronomical, but considering what the stock market has done during that time the underperformance becomes more evident.
Market Vectors Gold Miners ETF (NYSE: GDX)
The Market Vectors Gold Miners ETF follows 40 small-, mid- and large-cap companies around the world that are primarily involved in gold mining. Its top holdings include Goldcorp Inc. (USA) with a 13.6 percent holding, Barrick Gold Corporation (USA) at 12.8 percent and Newmont Mining Corp at 8.4 percent. GDX has outperformed GLD over the last 12 months down only 5 percent, but hasn’t been able to do the same over the last six, down 11 percent.
The chart of both ETFs offers little for the bulls.
GLD is trading at its lowest level since January and recently broke an important support at the $119.50 area. The next level of support is at the $114.50 area, which if broken would be a major sell signal. GDX has also been in a free fall and should find some support around the $22 level if the selling continues.
Gold may be setting up for a bounce, as India is entering a cultural period where gold has historically been at its highest demand. That being said, the charts of both ETFs are ugly. No long-term fundamental catalysts will drive investors back into the metal unless the geopolitical situation escalates greatly.
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