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Here's Why You Should Buy The Dip In Gold ETFs

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Here's Why You Should Buy The Dip In Gold ETFs
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After spending considerable time as one of this year's hottest exchange-traded funds, the SPDR Gold Trust (ETF) (NYSE: GLD), the world's largest ETF backed by physical holdings of gold, has retreated 5.5 percent over the past month.

Not surprisingly, much has been made of this decline. Spotting catalysts for gold's recent weakness is not difficult, either. The primary catalysts include speculation that the Federal Reserve will soon raise interest rates. Higher interest rates diminish the allure of gold, which pays no interest or dividends. Likewise, Fed speculation has boosted the dollar, in turn punishing dollar-denominated commodities such as gold.

However, a case can be made that GLD and gold itself have retreated too far too fast.

Is The Dip Too Sudden?

“One possible reason for the exaggerated response was the absence of the key Chinese market for a national holiday, ironically known as 'Golden Week,'” said State Street in a recent note. “China is the world's largest consumer of gold, and, under normal circumstances, the market would have expected Chinese consumers and investors to step up their purchases to take advantage of bargain prices”

Related Link: These ETFs Could Endure An Oil Slide

Likewise, gold does not always decline as the dollar rises. Historical data confirm that over the last 45 years, gold performs well when the dollar languishes, is solid when the dollar is flat and loses ground when the greenback gains momentum, but there are exceptions.

Gold And Inflation

Even a couple of rate hikes here in the United States would not be long-term damaging to gold and there are still plenty of developed and emerging economies poised to continue paring borrowing costs, not to mention the many developed nations with negative interest rates.

“When inflation is taken into account, US real interest rates have stayed in negative territory — meaning the inflation rate is greater than nominal interest rates,” noted State Street. “This lowered gold’s perceived 'zero yield' barrier and stoked demand. Even though nominal rates have risen over the last couple of days, real rates remain decidedly negative. We view this as continued positive to the price of gold.”

Investors have added $12.3 billion to GLD this year, making it 2016's top asset-gathering ETF.

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