Gold: The 2024 Equity Hedge | ETF Trends

Markets breathed a collective sigh of relief regarding the Fed’s rate cut outlook remaining unchanged. With three potential rate cuts forecast for this year, gold remains an attractive equity hedge.

Increased economic activity in recent months caused concern over potential changes to the Fed rate path. Investors mulled whether rising demand and a tight labor market alongside sticky inflation would cause the regulatory to change course.

Those worries, for now, remain unfounded as the Fed revealed on Wednesday that it still anticipates cutting rates by 0.75% this year. Falling rates will lead to weakening in the U.S. dollar. In turn, this makes gold increasingly attractive for its store of value as well as an equity hedge. Falling interest rates historically benefit gold.

“Gold is still one of our favorite trades for 2024 as an attractive portfolio hedge for equity investors,” Bank of America Research wrote in a note yesterday, reported Reuters.

Concerns of equity valuations continue to plague markets as well. Add in the potential knock-on effects of a depreciating dollar, and hedging for equity risk holds strong appeal this year. A 2018 study titled “Is Gold a Sometime Safe Haven or an Always Hedge for Equity Investors” analyzed the correlation of gold against equities through a number of time periods. The authors concluded that while gold doesn’t offer a significant safe haven during market crashes such as the great financial crisis; it provides a steady equity hedge.

“We think that a review of the results from earlier papers on this issue, coupled with our findings, points to the fact that gold is always a Hedge,” He, O’Connor, and Thisjessen, the authors, wrote. That or, “at worst, always an excellent diversifier of portfolio risk.”

Play Gold’s Strength in 2024 With Miners

A positive outlook for gold prices this year benefits not just direct investors but upstream companies such as gold miners. Constructive gold prices could prove beneficial this year for related equities and Sprott ETFs offers two different types of access to miners likely to benefit.

The Sprott Gold Miners ETF (SGDM) seeks to track the Solactive Gold Miners Custom Factors Index. The index provides exposure to U.S.- and Canadian-listed gold companies of significant size. It seeks to target companies with high free cash flow yields, largest revenue growth, and those carrying low long-term debt to equity.

The current breakdown of cap size within the fund is 47.23% large-cap companies over $10 billion, 31.34% medium cap companies of $2 billion to $10 billion, and 21.44% companies with less than $2 billion, as of 02/29/24. SDGM carries an expense ratio of 0.50% with current fee waivers.

For potentially growthier, nascent exposure to gold miners, the Sprott Junior Gold Miners ETF (SGDJ) is worth consideration. The fund seeks to track the Solactive Junior Gold Miners Custom Factors Index.

The index contains small-cap gold miners with a market cap between $200 million and $2 billion. The average weight of a company within the fund was $996 million as of 02/28/24.

SGDJ focuses on gold producers with the largest revenue growth. The fund also includes junior exploration companies with the strongest stock price momentum. SGDJ carries an expense ratio of 0.50% with current fee waivers.

For more news, information, and analysis, visit the Gold/Silver/Critical Materials Channel.