Gold ETFs Remain Prime Fed Defense

The Federal Reserve continues to vex investors. Last Friday, SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL) and other gold-related exchange traded products were punished after a member of the Federal Reserve said the U.S. central bank should not wait too long before raising interest rates.

Those ETFs could not catch a break Monday even after another Fed member reiterated some dovish views on interest rates. However, even with all the recent consternation regarding the Fed’s impact on gold, the aforementioned ETFs are down less than 1% over the past month. While that reminds investors of gold’s sensitivity to Fed commentary, it should also be a reminder that gold is one of the places to be when the Fed does not raise rates.

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Gold has enjoyed greater demand in a low interest-rate environment as the hard asset becomes more attractive to investors compared to yield-bearing assets. However, traders lose interest in gold when rates rise since the bullion does not produce a yield.

Higher interest rates weigh on gold and other hard assets as the commodity pays investors nothing and struggles to compete with yield-generating assets when borrowing costs increase.

“Gold prices have an inverse relationship with interest rates. As interest rates rise, non-interest-bearish assets like gold become less attractive in comparison. In addition, a rate hike would send the dollar higher, hurting the value of bullion in dollar terms, as it would take fewer more-valuable dollars to buy the same amount of gold,” reports CNBC.

Macquarie thinks investors are tiring of “fixed income markets that don’t generate income, and a stock market rally that has run out of steam amid anemic economic growth. World governments could resort to drastic measures if commodities like gold or cryptocurrencies begin to gain real steam,” according to ETF Daily News.