Gold Close To Touching Six-Year High? Leveraged ETFs To Play

Gold is finally gathering the steam needed to lift prices to a level not seen since 2013, per Bloomberg. Bullion may hit $1,400 an ounce this year as investors hedge risk, according to Rhona O’Connell, head of market analysis for EMEA and Asia regions at INTL FCStone Inc. while Citigroup (NYSE:C) believes gold price may hit $1,500. The metal is currently trading around $1,332. SPDR Gold Shares (NYSE:GLD) (TSXV:GLD) is up 4.2% past month (as of Jun 7, 2019).

What Could Trigger the Rally?

The likelihood of deepening U.S.-China trade crisis is likely to boost gold. U.S. Treasury Secretary Steven Mnuchin indicated President Donald Trump will decide on additional tariffs on China after meeting Chinese leader Xi Jinping later this month. “If China doesn’t want to move forward, then President Trump is perfectly happy to move forward with tariffs to re-balance the relationship,” per Mnuchin.

Notably, the Trump administration lifted tariffs on $200 billion worth of Chinese goods from 10% to 25% from May 10 and then banned Chinese firm Huawei Technologies and 26 of its affiliates from doing business with American companies. Trump is now considering additional tariffs on an incremental $325 billion of Chinese imports (read: 4 High-Dividend ETF Winners Amid May's Trade Tantrum).

So, the chance of continued dispute is pretty high as is the level of uncertainty in the market. Since gold is viewed as a safe-haven asset, further run is well-expected in the current condition.

Fed’s dovishness for 2019 is yet another tailwind. The Fed has not enacted any rate hike so far this year and remains patient for the future course too. There are high chances that the Fed could cut rates ahead given downbeat jobs data for the month of May and trade tensions. Several central banks like the ECB and BoJ are still practicing negative interest rate policies.

Central banks’ gold buying is yet another strength. Some of these contributed to a 7% rise in global gold demand in the first quarter from a year earlier, according to the World Gold Council, published on Financial Times. Russia was the biggest buyer during the period, followed by China.

During the last four quarters, central banks' gold buying hit a record high of 715.7 tons. The momentum carried on in the second quarter too. Central banks purchased more gold in April (according to a report by the World Gold Council), marking an 8% increase month on month. China increased its gold reserves by 1.88% last month, according to the central bank.

The IMF also cautioned about global growth tensions. The IMF expects the global economy to grow 3.3% in 2019, down from 3.6% in 2018, according to its latest World Economic Outlook report issued Apr 9. This marks the slowest expansion since 2016. Overall, 70% of the global economy is forecast to slow down this year. Trade tensions between the world’s two biggest economies, the United States and China, have increasingly weighed on business confidence. This is another reason to be bullish on gold prices.

Any Wall of Worry?

The U.S.-Mexico trade deal could trigger a market rally in the near term, which can fade the dazzle of gold investing for a short spell. However, the metal’s long-term lure rests on the U.S.-China trade relations and the Fed’s activity.

ETFs in Focus

Against this backdrop, investors can keep track of gold ETFs like VelocityShares 3x Long Gold ETN UGLD, DB Gold Double Long ETN (BS:DGP) , ProShares Ultra Gold UGL, DB Gold Double Short ETN DZZ and VelocityShares 3x Inverse Gold ETN (TSXV:GLD) (see all precious metals ETFs here).

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