Federal Reserve interest rate uncertainty is good for gold and bullion-related exchange traded funds (ETFs) whether there is a rate increase or not.
In previous periods when the Federal Reserve had been slow to raise rates in line with inflation, gold prices benefited, according to a ETF Securities note, and the Fed seems to be repeating the same policy.
U.S. core inflation, which excludes food and energy, dipped for the first time in 10 months in March to 2.2% from 2.3% in February. Meanwhile, the unemployment numbers have also declined and participation rates are rising.
This “means that inflation is likely to increase substantially should the Fed keep its policy setting quite low,” according to ETF Securities.
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ETF Securities also pointed out that when Fed rates have gone up, gold prices have typically increased as well, even though the dollar-buying spree that usually occurs after a rate hike tends to be negative on gold.
Given the market’s perception that a Fed rate hike is not imminent, a rapid rate hike in the event the Fed admits a policy error correction could trigger volatility for a number of asset classes, which would also be a boon for safe-haven assets like gold.
“Gold, which can be used defensively much like a monetary asset, is likely to outperform other asset classes when uncertainty increases and cyclical markets are behaving bearishly,” according to ETF Securities.
[related_stories]ETF Securities also pointed to a number of other “shocks” that could help support gold as a defensive play.
“For long-term investors, gold remains a good instrument to hedge against uncertainty,” according to ETF Securities.
For instance, in the U.K., a referendum on June 23, 2016 will determine whether or not the nation will remain in the European Union or make a “Brexit,” potentially triggering a destabilizing event. In the Middle East, posturing between Saudi Arabia and Iran, along with the refugee crisis out of Syria, are also risks to watch.
“Any of these issues could shock the market and bring volatility back to the fore,” ETF Securities added.
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Consequently, investors one can take a look at gold ETFs to hedge against some lingering market uncertainties.
For starters, the SPDR Gold Shares (NYSEArca: GLD), the world’s largest ETF backed by physical holdings of gold, has been a go-to option for large traders, hedge funds and institutional investors seeking to capitalize on its large pool of liquidity and tight bid-ask spreads.
Similarly, the iShares Gold Trust (NYSEArca: IAU) is another large option with a lot of active trading. Alternatively, since IAU and GLD shares are backed by gold stored in London vaults, investors can take a look at the ETFS Physical Swiss Gold Shares (NYSEArca: SGOL), which stores its physical gold holdings in Swiss vaults. The three gold ETFs have gained over 19% so far this year.
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