The biggest gold-backed ETF, SPDR Gold Shares (NYSEArca: GLD), and rival gold funds have recently retreated as investors have flocked toward riskier assets, such as equities, but the case for owning bullion remains solid.
Data suggest some investors remain fond of bullion and the related low-cost ETFs, even if that fondness is merely for small portfolio allocations. Falling interest rates around the world are among the catalysts bolstering the case for gold and ETFs such as GLD.
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.
“Heading into 2019, market-implied US real interest rates were hovering around 1.0%, and both the Fed and European Central Bank (ECB) were projecting multiple interest rate hikes coupled with reductions of their balance sheets,” said State Street in a recent note. “But lower global growth expectations, a prolonged trade dispute between the US and China, and an inversion of the yield curve have shifted the positive interest rate trajectory 180 degrees. Since the start of this year, real interest rates have collapsed (dipping below zero in Q3 2019), with the Fed and ECB changing course back to accommodative monetary policies.”
Embracing Gold ETFs
While gold often serves as a safe-haven asset in times of economic uncertainty, investors who have turned to GLD for investment have been richly rewarded.
“As investor demand for bonds has risen, it has helped bid up bond prices, putting further pressure on yields. Globally, negative yielding debt has climbed from $7 trillion to $13.4 trillion over the last 12 months,” according to State Street. “This quick growth in negative yielding debt has created an attractive carry for gold, despite it not offering a yield in the traditional sense. On a relative basis and in face of continued negative rates – both real and nominal – gold’s opportunity cost is rapidly converting into an ‘opportunity benefit.’”
Unlike most other ETFs, precious metals ETFs like GLD are physically backed by the underlying commodity. In this case, each share of GLD is backed by physical gold bullion stored within HSBC’s London vaults. The trust currently tracks 896.8 metric tons of gold.
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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.