On the back of a June surge, gold ETFs, including the SPDR Gold MiniShares (NYSEArca: GLDM) and SPDR Gold Shares (NYSEArca: GLD), performed well in the second quarter and with the Federal Reserve poised to lower interest rates, the stage is set for more upside for gold ETFs.
Boosting the case for gold is that the Federal Reserve recently alluded to a potential rate cut or two, perhaps as soon as this week. The capital markets initially expected rates to remain steady after the central bank spoke in more dovish tones following the fourth and final rate hike for 2018 last December.
“Gold broke above $1,400/oz for the first time in nearly six years, rallying 8.77% in Q2 2019 as the world’s major central banks turned dovish due to rising global trade tensions starting to impact economic data,” according to State Street data. “Since October 2018, gold has appreciated 18.68% as the total amount of bonds offering negative yield has more than doubled from $6 trillion to roughly $13 trillion during the same time.”
Waiting On The Fed
The market expectation of future rate cuts by the Federal saw gold surpass its 5-year high after the central bank said it “will act as appropriate to sustain” economic expansion. Gold prices took a breather by falling below the $1,400 price level, but it could be the precursor to more gains ahead.
With the central bank keeping rates steady thus far in 2019, the next move investors are hoping for is a rate cut, especially if the Fed is sensing a slowdown given the latest economic data. That should give gold ETFs a boost through the rest of the year until a cut actually happens.
The growing number of negative-yielding bonds, including corporates, around the world, boosts the allure of gold ETFs.
“The argument that investing capital in gold-backed ETFs involves significant opportunity cost loses validity as the total amount of bonds bearing negative yields has continued to grow,” according to State Street.
Gold ETFs are pushing to 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 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.
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