As Thursday’s equity market slide reminds investors, there haven’t been many sources of refuge lately, nor have many assets and the related ETFs remained within striking distance of their 52-week highs.
Neither of those statements are applicable to gold and ETFs such as the SPDR Gold Shares (NYSEArca: GLD) and the SPDR Gold MiniShares (NYSEArca: GLDM) as both of the marquee gold ETFs reside near 52-week highs as investors have flocked to bullion amid coronavirus volatility.
As the coronavirus outbreak continues to be the wild card in the markets, the safe haven of precious metals is in high demand, especially for exchange-traded funds (ETFs) that are backed by gold. ETFs have been stockpiling gold as more coronavirus news continues to invade the financial markets.
“Global gold-backed ETFs (gold ETFs) and similar products added 84.5 tonnes(t), or net inflows of US$4.9bn, across all regions in February, boosting holdings to new all-time highs of 3,033t,” said the World Gold Council (WGC) in a note released Thursday.
Going With Gold
As is often the case, monetary policy looms large for GLD and GLDM and that set up is favorable after the Federal Reserve lowered interest rates by 50 basis points earlier this week.
Gold ETFs previously rallied amid increased expectations of a U.S. rate cut, even as some investors locked in profits from bullion’s recent rally. Gold is believed by many investors to be inversely correlated with interest rates. Rising interest rates make bonds and other fixed-income investments more attractive so that the money will flow into higher-yielding investments, such as bonds and money market funds, and out of gold, which offers no yield at all during times of higher interest rates, and back into gold ETFs.
Importantly, gold is living up to its billing as a safe haven asset.
“Market uncertainty surrounding the potential impact of the coronavirus outbreak on the global economy drove strong inflows to all regions during the month. North American funds led regional inflows (+42t, US$2.3bn, 2.9% AUM), while European funds added 2.8% to assets (+33t, US$2.0bn),” according to the WGC.
The aforementioned rate cutting could be an important catalyst for GLD and GLDM going forward.
“Multiple drivers continue to support the demand for gold moving forward. US Treasuries have been the recipient of risk-off flows. The US 10-year and 30-year bond rates continue to hit all-time lows, improving the opportunity cost of holding gold,” notes the WGC.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
