Gold ETFs Shine Amid Market Turmoil

Another year, another decline in prices. That's been the story for commodities so far in 2016. But amidst carnage, one commodity is slowly creeping higher, just when everyone had left it for dead.

That commodity is none other than gold. The safe-haven yellow metal is back on the rise after three-straight down years. So far in 2016, it's up a solid 13%, last trading just below the $1,200/oz mark.

1-Year Spot Gold Price

Like most commodities, gold fell continuously throughout 2015 on the back of concerns related to demand from China and a surging dollar. Prices briefly fell to a six-year low around $1,046 late last year before the latest turnaround began to take hold.

Gold A ‘High-Yield’ Asset

While other commodities like oil or copper have been hurt by the latest stresses affecting financial markets, gold has benefited.

This year's plunging stock markets bolstered the appeal of the safe-haven metal. But gold also got a boost from a surprising decline in the U.S. dollar, particularly on Wednesday of last week, when the greenback had its worst daily decline in seven years.

Growing expectations that the Fed may throw in the towel on its four-rate-hike plan for 2016 knocked the dollar from its highs. Now the buck―whose surge was blamed for gold's weakness during the last few years―may be vulnerable to further selling as the crowded trade begins to unwind, say some analysts.

US Dollar Index Retreats From Its Highs

Meanwhile, sinking yields on government bonds are another factor in gold's ascent, especially now that the Bank of Japan has joined the European Central Bank and others in experimenting with negative interest rates on government bonds.

Even though it yields zero, "All of a sudden, gold is a high-yield asset because there's [so many] bonds around the world yielding negative," said John Ciampaglia, executive vice president at Sprott Inc.

About 40% of European sovereign bonds have negative yields, according to Deutsche Bank, a number that could rise if the European Central Bank expands its quantitative easing program as expected in March.

Sustainable Rebound, Or Bear Market Rally?

It's easy to get excited about the latest jump in gold prices, but it's important to put it in perspective as well. A look at the five-year gold chart reveals there have been many brief rallies in the gold price, but each has quickly fizzled, opening the door to a renewed decline.

In fact, gold rose as much as 10% last January also, but ultimately ended the year down by that same amount.

5-Year Spot Gold Price

It remains to be seen whether this is the recovery that finally puts gold back on a sustainable, bullish path or if this is just another bear market rally.

GLD & Miner ETFs On The Rise
In any case, ETF investors have wasted no time in scooping up what they see as bargains in the precious metals space. The SPDR Gold Trust (GLD | A-100) saw the most inflows of all exchange-traded funds last week, and has picked up $1.8 billion of investor capital so far this year.

GLD's 13% gain for the year closely matches the return for spot gold prices.

Meanwhile, as they typically do, miner ETFs handily outperformed spot gold on the way up. The Market Vectors Gold Miners ETF (GDX | C-81) and the Sprott Gold Miners ETF (SGDM | B-70) added 29.9% and 28.8%, respectively, year-to-date.

"We've seen a rotation from out of the general stock market into mining stocks," said Sprott's Ciampaglia. "There's a bit of a short squeeze going on. A lot of hedge funds that were big beneficiaries of shorting gold mining stocks last year may be covering those shorts."

Of course, who could blame hedge funds for pressing their short bets? This latest jump notwithstanding, it's largely been a one-way trade for gold mining ETFs. From a peak of $66 in 2011, GDX hit a low of near $12.50 in mid-January before taking off just in the last few weeks.

YTD Returns For Gold, GLD, GDX, SGDM

Just as with gold, only time will tell whether this recovery in the miner ETFs has staying power.

Contact Sumit Roy at [email protected].