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Gold is poured into moulds for bars in Cajamarca, Peru. As stock markets plunged recently, gold did not rise as expected. It experienced a sizable pullback.

RUTH FREMSON

Most commodities trade on basic supply-and-demand fundamentals. Not gold. What moves the price of the shiny metal is much more complex – perhaps now more than ever.

In normal times, gold is considered a safe haven in volatile markets and a hedge against inflation: When stock markets tank or the economy grows too quickly, the price of bullion rises.

But the latest breakdown in that relationship occurred recently when the equity benchmark Dow Jones Industrial Average plunged by 8.5 per cent between Jan. 26 and Feb. 5. The stock selloff was attributed to fears that as the economy strengthened, the U.S. Federal Reserve would aggressively raise interest rates to ward off inflation.

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As stock markets plunged, gold didn't rise as expected. It fell 3.5 per cent over the same period.

"I think gold is its own little world," says Todd Colvin, a gold analyst and broker with Chicago-based Ambrosino Brothers.

To further muddy the waters, gold is traded in U.S. dollars. The prospect of higher U.S. interest rates normally drives up bond yields and the U.S. dollar, but the greenback has been falling in value since November. In normal times, that U.S. dollar discount drives gold prices up. Not this time.

"When I look at gold, I look at it as a barometer for two things: the U.S. dollar/Fed [Federal Reserve] and that global-macro [inflation] hedge, and nothing is trading normally," says Mr. Colvin.

The price of gold has plunged from its all-time high of US$1,900 in September of 2011, following a concerted effort by central banks to slash interest rates in the wake of the 2008 global financial meltdown. As low borrowing costs helped to fuel an equity bull market, bullion fell to US$1,030 by December of 2015.

From that bottom, the prospect of higher interest rates resulting from strong economic growth in the era of U.S. President Donald Trump lifted gold to US$1,300 by early February of this year.

At the same time, gold has been weighed down by the advent of the cryptocurrency bitcoin, which is seen as a rival to bullion as a store of value and a hedge against inflation.

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"The cryptocurrency fad seems to have added a new layer, as the new 'digital gold' stole some of the 'real gold' thunder. But given the uncertainty and security issues, it has a way to go in order to replace the old shiny metal," says Mr. Colvin.

With all those factors at play on gold, he says bullion is at, or near, a bottom.

"With a lot of balls in the air – with cryptocurrencies and Fed meetings and stocks coming off – there is some definite upside," he says.

He says gold's future should become more clear with the appointment of Fed chair Jerome Powell, who replaces Janet Yellen as the head of the U.S. central bank.

"It's one of those trades where we're waiting to see what happens when [Mr.] Powell steps in, we're waiting to see what happens when the Fed tightens, how much are they going to tighten this year."

Fawad Razaqzada, a technical analyst with Forex.com in London, says gold's recent selloff doesn't add up.

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"I'm a little bit surprised by gold's sizable pullback recently, especially given the simultaneous selloff in the stock markets," he says. Regardless, he remains "moderately bullish, but bullish nonetheless" on gold.

Mr. Razaqzada considers the floundering U.S. dollar the primary driver that has lifted gold prices by nearly 6 per cent since December, even when the more recent selloff is factored in.

"First and foremost, it's the weaker U.S. dollar that has been supporting gold. It's the No. 1 reason why it's up," he says, adding that gold might find further support if it turns out that an early February rally in the U.S. dollar was just a pullback in a downtrend, rather than a trend reversal.

As a technical analyst, Mr. Razaqzada charts past market movements to determine future trends. Those trends are determined when prices fall below established support levels or rise above resistance levels.

In other words, he expects gold to head "decisively higher" if it breaks above a US$1,350 level of resistance. However, if gold falls below the key US$1,300 support level, he says it's "game over for the bulls."

"I am bullish at the moment. However, I'll be very quick to change my view should some key support levels break down," he says.

He adds the weak U.S. dollar could give an edge to Canadian investors who can get more U.S. dollar denominated gold for their Canadian bucks – provided crude oil can hold its gains above US$60.

"The Canadian dollar tends to follow the price of oil more closely than it does gold because Canada is a large exporter of crude oil," he says.

He does, however, concede another less certain factor could be influencing gold beyond his charts: fear.

"It rose last year despite stock market gains. Gold has already been going up, which suggests to me that investors are using gold as a hedge, not just against inflation, but a potential stock market correction that could come at any time," he says.

ETF exposure to gold

Investors looking for exposure to gold through Canadian listed exchange-traded funds (ETFs) have a few options. Posted returns are minus fees.

– The iShares S&P/TSX Global Gold Index ETF (XGD) tracks the performance of the S&P/TSX Global Gold Index. The index is comprised of 50 precious metals stocks based on their market capitalization. Management expense ratio (MER): 0.61 per cent.

– The iShares S&P/TSX Capped Materials Index Fund (XMA) tracks the S&P/TSX Capped Materials Index. The relative weight of any single holding is capped at 25 per cent. MER: 0.61 per cent.

– The BMO Junior Gold Index ETF (ZJG) tracks the performance of 30 junior gold stocks that make up the Dow Jones North America Select Junior Gold Index based on their market capitalization. MER: 0.34 per cent.

– The BMO Equal Weight Global Gold Index ETF (ZGD) tracks the S&P/TSX Equal Weight Global Gold Index. It invests in and holds global gold companies in the same proportion as they are reflected in the index. MER: 0.62 per cent.

– The Horizons Enhanced Income Gold Producers ETF (HEP) tracks the performance of 15 equally-weighted senior global gold and silver producers. MER: 0.82 per cent.

– The Horizons BetaPro S&P/TSX Global Gold Bull Plus (HGU) is a leveraged ETF that seeks to correspond to two times the daily performance of the S&P/TSX Global Gold Index. MER: 1.5 per cent.

– The Horizons BetaPro Canadian Gold Miners –2x Daily Bear (HGD) is also a leveraged ETF that seeks to correspond to two times the inverse (opposite) of the daily performance of the Solactive Canadian Gold Miners Index. The index includes Canadian precious metals companies. MER: 1.5 per cent.

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