The SPDR Gold Shares (NYSEArca: GLD), the world’s largest gold-backed ETF, is up nearly 17% year-to-date, but one of the most common complaints gold investing lingers: that the yellow metal (and other commodities funds) don’t generate income. Some see that notion as increasingly relevant in a low-interest rate environment.
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.
“Gold, however, doesn’t offer a yield because it has no default risk to compensate its holders, a key rationale for its strong returns historically during negative rate environments,” said George Milling-Stanley, State Street’s chief gold strategist, in a recent note.
Plenty Of Catalysts, Even Without Income
Investors have shifted over to safe-haven plays like gold in face of renewed anxiety over trade tensions between the U.S. and China, the two biggest economies in the world, and growing fears of a global slowdown.
The rally in precious metals was also fueled by a shift in the Federal Reserve’s monetary policy after it cut interest rates for the first time in a decade. The expectations for lower borrowing costs bolstered the gold outlook as bullion typically underperforms yield-generating assets in a period of rising rates.
“While some may question if negative interest rates (nominal or real) are an effective tool, it’s becoming harder to ignore the mounting negative debt pool, the growing number of players partaking in the negative yield experiment and the role it may play in redefining the new normal for investors over the next decade,” said milling-Stanley.
Data suggest that the lower interest rates decline, or the more they become negative, the more investors are willing to embrace gold ETFs even though gold ETFs don’t offer interest or coupons. Flows data for gold ETFs in Europe confirm as much.
Notably, since the ECB’s policy move in 2016, European investors have poured in excess of $26 billion into gold-backed ETFs, compared to $13 billion by US investors over the same timeframe,” according to Milling-Stanley.
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