The commodity market has seen a surge lately, with precious metals deserving a special mention. A falling dollar in the wake of a volley of subdued U.S. data points, concerns over global growth and an acute plunge in oil prices have marred the possibility of frequent rate hikes this year. This has taken the shine off the greenback and has helped the rally in precious metals in the first quarter of 2016 (read: ETFs to Rise if Dollar Falls).
Within the entire collection, the surge in gold was unparalleled, approaching 'the best quarter in nearly 30 years'. Gold bullion ETF iShares Gold Trust ETF (NYSEARCA:IAU) has advanced 16.1% so far this year (as of March 31, 2016).
The ETFS Physical Silver Trust ETF (NYSEARCA:SIVR), which looks to reflect the price of silver bullion has added 11.5% this year, followed by a 9.6% jump in the ETFS Physical Platinum Shares ETF (NYSEARCA:PPLT). The PowerShares DB Precious Metals ETF (NYSEARCA:DBP) is up 15.5% so far this year (as of March 31, 2016) (read: Gold ETFs Regaining Their Glitter).
Will This Uptrend Continue?
Agreed, the Fed Chair has recently hinted at a 'cautious' stance on future policy tightening, taking into account the downside risks emanating from global financial market upheaval. And it also lowered its number of rate hike estimates for 2016 from four to two in its March meeting, which in turn has dampened the U.S. dollar.
But will the dollar trend be so glum if the U.S. economy continues to offer back-to-back upbeat economic data. This is truer in the face of improving trend seen in the labor and manufacturing sector. Meanwhile, Q4 2015 U.S. GDP was adjusted higher, from the advanced estimate of 0.7% to 1.0% in the second estimate and then finally to 1.4% in the third reading. This gives cues of positive economic development at home.
Moreover, the demand-supply scenario is hardly balanced in the commodity market. The issue is especially evident in case of agricultural prices. Supply glut and lower demand has been a longstanding problem in the agro-field. However, investors should note that despite the downbeat underlying fundamentals, the Teucrium Agricultural ETF (NYSEARCA:TAGS) rose 6% in the last one month (as of March 31, 2016).
Coming to the industrial metals, investors should note that many of these are highly susceptible to Chinese economic condition. Though China's manufacturing sector has grown surprisingly in March since July 2015, the situation is still shaky. This might put a basket of commodities like copper and nickel in a false position, going forward.
Crude oil also bounced back in the middle of the first quarter on output freeze talks by major oil producers. But with several energy companies getting delisted in recent times and supplies still brimming, the road ahead for crude is definitely slippery.
Keeping aside the fundamentals, profit-taking activity after such a bullish run can also cause a dip in the commodity ETFs segment. As of March 31, 2016, the relative strength index of the SPDR Gold Trust ETF (GLD), the PowerShares DB Precious Metals ETF (DBP) and SIVR stood at 50.28, 51.13 and 51.93, respectively, indicating that these are nowhere near the oversold territory.
So, edgy investors should have a cautious approach toward commodity investing. However, as long as global growth issues keep dominating headlines, safe haven assets like gold will likely have an upper hand. So, even if other commodities fall flat, gold ETFs have higher chances of further price appreciation if the Fed stays dovish.
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