How far will the Fed go with interest rates? It remains unclear whether the market’s mini rally has priced in interest rates or if another 75 basis point hike from this week’s FOMC meeting might be the straw that breaks the rally’s back – but instead of reading tea leaves, investors may want to consider what rate hikes might mean for gold miner ETFs like the Sprott Gold Miners ETF (SGDM).
It may seem counterintuitive, given how interest rate spikes are seen as making fixed income offerings like bonds or money market funds more appealing than a highly valuable, but financially and chemically inert metal. But historical data reveals many cases in which gold and interest rates rise together rather than trend apart.
Gold rose significantly in the 1970s just as interest rates were rising. Rates rose from a 1971 low of 3.5% to 16% by the start of the 80s, with gold rising from $50 an ounce to almost $850 in the same time frame.
Gold may also stand to benefit should markets take a hit from more interest rate hikes. An additional 75-point hike is one thing, but further hikes may push markets – which had perhaps anticipated the Fed cooling its jets – into a significantly more bearish mentality, ending the October rally. Should the situation turn, gold may become a popular option for those looking for safety.
Further, investors should consider how a strengthening dollar is impacting other economies around the world. Driven by rising rates in the United States, the dollar has thrown other currencies for a loop, which may see foreign interest drive up the value of gold.
SGDM tracks the Solactive Gold Miners Custom Factors Index and invests in gold miners around the world for a 50 basis point fee. Targeting multi-cap firms, SGDM weights firms and then assesses them based on revenue growth, debt-to-equity ratio, and free cash flow yield based on its index. The index is reconstituted and rebalanced quarterly.
SGDM has seen $16.1 million in one-year net inflows, returning 1.4% over one month compared to -8.2% over the last three months. For those on the lookout for gold miner ETFs, follow SGDM through the rate hike season.
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