The bullion market has shown signs of recovery in the past few days and the price of the SPDR Gold Trust ETF (NYSEARCA:GLD) rallied to hover above $117. The recent TLTRO wasn't a success, which could bring down the euro. This could also have some adverse ramifications for GLD. Looking forward, the upcoming FOMC meeting could also bring down GLD and wipe out the latest gain it recorded. Let's see why.
The second TLTRO was concluded on Thursday with relatively mediocre results as the ECB announced that only €129.84 billion was allocated towards the TLTRO. This brings both TLTRO plans to €212 billion - well below ECB's total cap of €400 billion and below market expectations. This result is likely to bring the ECB a step closer towards going out on a full-blown quantitative easing plan. Such a plan is likely to depreciate the euro against the U.S. dollar, which isn't likely to benefit the price of GLD. The correlations among GLD and leading currencies pairs have weakened in recent weeks.
Source of Data: Bloomberg
The recent developments related to the gold market, including negative GOFO rates, may have offset the impact of the changes in the U.S. dollar on GLD prices. But over the long term, the changes in the U.S. dollar are likely to have a strong effect on GLD; so that if the U.S. dollar keeps recovering against the euro and yen, GLD could suffer.
The FOMC and GLD
Next week's FOMC meeting could be the one to bring back down GLD. The FOMC is likely to address the recent developments in the U.S. economy, including the better-than-expected nonfarm payroll report. Conversely, the latest GDP report showed a higher-than-expected growth rate but with an asterisk: The growth rate reached 3.9% in the past quarter, but the driver behind this growth rate was higher government spending - mostly in defense - and a rise in inventory investment. The real personal consumption expenditures rose by only 2.2% in the third quarter. Nonetheless, the IMF still projects the U.S. economy to grow faster next year compared to 2014 with a growth rate of 3.1% - private consumption to expand by 2.9%.
The FOMC is also likely to address whether it will change the wording of its statement most notably the changes in the term "considerable time." If the FOMC does omit this phrase, it could be interpreted as the FOMC taking a big step forward in raising rates.
In the meantime, the recent developments in the U.S. long term treasuries suggest a rise in demand for them.
Long-term yields have dropped in the past few days, as indicated in the chart above. This is another indication for a rise in demand for safe haven investments. This turn of events may have also provided some back-wind for GLD, which also rallied in recent weeks. The linear correlation between the 20-year treasuries yield and GLD was -0.314 over the past couple of months. This is a mid-strong negative correlation. At face value, the downfall of long-term yields is likely to keep coinciding with the recovery of GLD.
Finally, the developments in the oil market may have also played a secondary role in the progress of GLD.
Source of Data: Bloomberg
The correlation between the daily percent changes of crude oil and gold has picked up in recent weeks, so that falling oil prices may have also pressured down the price of GLD. Falling oil prices could be considered as a positive development for the progress of the U.S. economy, which doesn't vote well for bullion investments. This also reduces the demand for GLD among investors who seek to hedge against a potential rise in inflation - lower oil prices mean lower inflation.
All these developments suggest that the recovery of GLD could be a short one, especially if the FOMC continues to shift towards raising rates sooner rather than later. The developments in Europe and falling oil prices could also play a secondary role in bringing down GLD. For more see: The Recovery of Silver Came to a Halt - What is Next?
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