An array of gold-backed ETFs are soaring as investors price in lower interest rates around the world while looking for defensive assets, themes that are boosting the fortunes of the iShares Gold Trust (NYSEARCA: IAU).
Gold was one of the best-performing assets last month, strengthening 8% and touching its highest level since April 2013 after President Donald Trump escalated the trade war and announced additional tariffs on Chinese imports.
“Holdings in BlackRock’s iShares Gold Trust, the second-largest bullion-backed ETF, rose to a record on Friday, even as prices of the metal posted a second straight weekly loss,” reports Bloomberg. “The pile-in came as data showed U.S. payrolls grew at a slower pace in August, fueling haven demand and expectations for monetary easing. Lower rates are a boon for gold, which doesn’t offer a yield.”
Investors are embracing IAU and related ETFs as a quick and easy way to gain exposure to gold price movements as they hedge against market risks, help protect their purchasing power in times of inflationary pressures or capitalize on increasing demand from the emerging markets with a growing middle-income class.
Gold ETFs are pushing to the upside 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.
“The Fed will lower rates by a full percentage point between now and January to counter a steep slowdown in the U.S. economy, Deutsche Bank AG economists said in a note Friday,” according to Bloomberg. “A majority of traders and analysts surveyed by Bloomberg remained bullish on the metal, and money managers boosted their net-bullish positioning to a record, according to U.S. government data released on Sept. 6.”
Others are increasingly bullish on gold.
“We expect spot gold prices to trade stronger for longer, possibly breaching US$2,000 an ounce and posting new cyclical highs at some point in the next year or two,” said Citigroup in a note out Tuesday.
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