Gold, like other commodities, is denominated in dollars, meaning that when the U.S. currency is strong, commodities often languish. Well, the dollar is strong this year, making the performances delivered by the SPDR Gold Shares (NYSEArca: GLD) and the SPDR Gold MiniShares Trust (NYSEArca: GLDM) all the more impressive.
Amid the coronavirus-induced flight to safety, both gold and the dollar are benefiting, but if the latter falls off, ETFs like GLD and GLDM are poised to add their 2020 gains.
“Gold’s price movement and the catalyst behind rising investor interest in gold was initially driven by the extreme market volatility in Q1, illustrating gold’s historical ‘flight-to-safety’ advances during absolute market dislocations,” says Maxwell Gold, State Street head of gold strategy, in a recent note.
The fast-growing GLDM is also a low-cost gold ETF that has quickly attracted attention from buy-and-hold investors who are interested in the long-term benefits of incorporating a cheap gold investment in a diversified portfolio.
Turning to Monetary Policy
Although the dollar is strong, gold is getting a lift this year because monetary policy around the world is increasingly accommodative, enhancing the allure of gold in a low or negative interest rate environment.
“Investor focus has turned to the potential longer-term consequences of these monetary and fiscal decisions. At a high level, many of these actions may stand to benefit the outlook for gold,” notes Gold. “While gold has broadly tracked rising central bank balance sheet levels over the past two decades, gold investors should focus on the impact these debt levels may have alongside rising deficits and low rate policies on the US dollar (USD), and in turn the potential advantage for gold.”
If inflation is to spike as a direct result of these aggressive loose monetary policies, gold can also benefit as a way to help investors safeguard their purchasing power. Looking at average annualized returns during various inflationary periods, gold showed an annualized return of 8.4% when inflation was below 2% and an annualized return of 16.2% when inflation was above 5%.
The specter of inflation is a legitimate catalyst for GLD and GLDM.
“Instead, inflation may emerge in the form of currency devaluation, particularly with the US dollar, as a result of continued accommodative policies,” writes State Street’s Gold. “A weaker dollar is inherently an inflationary action because it reduces the purchasing power of US consumers and investors.”
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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.