Gold ETFs Rally as Central Banks Execute Loose Monetary Policies

Physical gold-backed ETFs rallied Monday as traders hedged against ongoing global uncertainty and loose monetary policies from central banks around the world.

The SPDR Gold Shares (NYSEArca: GLD) increased 2.1% on Monday, breaking out to a new 52-week high, while Comex gold futures were 0.8% higher to $1,767.3 per ounce.

“There was a bit of profit-taking early on, but prices should remain firm. Central banks are doing everything in their power to support the stock market and economy, which will eventually lead to inflation,” Phil Streible, chief market strategist at Blue Line Futures, told Reuters. “Yields on debt instruments are virtually zero, which increases physical demand for gold and silver as a safe-haven asset.”

The gold bullion has been a traditional safe-guard of wealth and purchasing power in times of high inflation, and the loose monetary policies should devalue the currency.

The U.S. Federal Reserve has announced a broad, $2.3 trillion stimulus package to bolster the economy ravaged by the coronavirus or COVID-19 outbreak. The pandemic has forced a record 16.8 million Americans to file for unemployment benefits since the week ended March 21.

Meanwhile, European Union finance ministers agreed on a half-a-trillion euro relief package to support their own coronavirus-stricken economies that are heading toward a recession.

“COVID-19′s deflationary effect has been a headwind for gold. But this trend should reverse in 2H20 as policy responses by governments and central banks gather traction,” UBS analysts said in a note. “Led by Fed easing, we now expect real U.S. interest rates to dip deeper into negative territory and perhaps even test the post-GFC (global financial crisis) lows.”

Furthermore, depressed interest rates diminish the opportunity cost of holding non-yield-generating assets, like gold.

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