Gold Could Face Near-Term Headwinds

By Richard Cox
Richard Cox
Richard Cox
July 20, 2014 Updated: April 23, 2016

When we are looking at some of the potential trends in the most commonly traded assets, one of the first trades that comes to mind can be found in gold. But for those that are looking to looking to buy the yellow metal from the long side, there are some important factors to consider. These considerations could lead to some struggling asset prices in commonly traded ETFs like the SPDR Gold Trust ETF (GLD) and the iShares Silver Trust ETF (SLV) , given the fact that precious metals tend to trade in lock-step and factors that are negative for gold tend to create a drag on the market’s perceived valuation in silver as well.

The Dollar, S&P 500

“Of central importance here is the changing stance at the US Federal Reserve,” said Jonathan Millet, market analyst at ForexMinute . “And the implications for the various ways that an end to QE stimulus will impact equity markets and the US Dollar.” Reductions (and an ultimate conclusion) in QE stimulus will be a clear positive for assets like the PowerShares DB US Dollar Index Bullish ETF (UUP) because there will be fewer Dollars running through the monetary system. On the other hand, we will also see likely declines in the SPDR S&P 500 Trust ETF (SPY) as there will be less stimulus propping up the prospects for corporate earnings. Without continued earning strength the SPY ETF is highly vulnerable, given the fact that we continue to trade near recent highs. Without additional help from the Federal Reserve, many investors will look to take a more cautious stance and move their money out of equity markets, as this will also create a pretty good opportunity to capture profits while they are still present.


Finally, these changes will create new dynamics for those investors that are focused on oil, and the United States Oil Fund LP ETF (USO) . Specifically, an end to QE stimulus will likely weigh on demand for energy products and oil in particular. To some extent, we will have to expect that the economy as a whole will see slowing performance outlooks in at least some sectors. So while this slowdown might not be drastic or detrimental, it would be naive to suggest that the end to stimulus programs would have no impact on the broader growth outlook.

So the implications for gold markets here are clear, as a stronger Dollar will be of no help to those that are looking to establish long positions in ETFs like GLD. It is important to remember that all of these markets are interconnected, and the changing policy stance at the Fed should have a relatively clear impact on all of these sectors, and in their own way. Investors will need to watch the next round of developments here, as this could easily turn out to be the main driver of most asset classes for the remainder of the year.