The SPDR Gold Shares (NYSEArca: GLD), the world’s largest exchange traded fund backed by physical holdings of gold, is down 1.6% over the past week and 9.2% over the past month, declines that many gold bugs are blaming on the specter of the Federal Reserve raising interest rates this week.
If the Fed does move forward with its first interest rate hike of 2016 at the conclusion of its two-day meeting on Wednesday, gold is seen as vulnerable because there are no interest and dividend payments attached to gold and bullion-based funds like GLD.
Over the past month, the big-name gold ETFs have incurred double-digit losses and gold’s weakness over that span is prompting some analysts to lower their 2017 forecasts on the yellow metal.
Now, the yellow metal and the aforementioned ETFs turn their attention to Federal Reserve’s December meeting, which is widely expected to deliver the central bank’s first interest rate increase of 2016. However, a couple of rate hikes might not doom GLD and rival gold ETFs.
“Yet ETF Securities’ Maxwell Gold has a different take: He believes that despite the bearish sentiment swirling around gold, rate hikes don’t spell disaster for precious metals: Historically, environments similar to today’s have benefited metals,” reports Teresa Rivas for Barron’s.
Related: Demand Supports Gold ETFs
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.
Fed funds futures imply a rate hike of 25 basis points later this week is almost guaranteed, but the same metric also implies increases of no more than 150 basis points for all over 2017.
“Historically, there have been four similar periods to today’s rate environment whereby rising policy interest rates followed either falling or relatively low interest rates for sustained periods (1976, 1987, 1994, and 2004). When examining the impact before and after an initial rate hike at the onset of these tightening periods, performance on average across the metals complex has been mostly positive,” according to the ETF Securities note seen in Barron’s.
For more information on the gold market, visit our gold category.
Tom Lydon’s clients own shares of GLD.