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Beyond Coronavirus, What's Driving Gold ETFs?

Sanghamitra Saha

Gold had a sizzling January, thanks to the flare-up in equity market volatility and the resultant safe-haven rally. Middle-East tensions and the coronavirus outbreak kept the global markets edgy. Gold bullion ETF SPDR Gold Shares GLD added about 4.5% in the month. The global stash of gold in exchange-traded funds touched the highest level in seven years (read: 5 Gold ETFs Riding the Safe Haven Rally).

But is it only coronavirus that has been backing gold? The latest investments in bullion-backed ETFs follow four consecutive years of inflows. Below, we discuss a few reasons why gold has more room to run:

Global Policy Easing, Negative Yielding Debt

Most developed and emerging economies have been on a policy easing mode.The pool of securities with a yield below zero jumped by $1.16 trillion at late-January. The ECB and the BoJ have benchmark interest rates at negative territory. The “low real rates, and a reluctance to normalize policy at the Fed, the Bank of Japan and European Central Bank” have been driving the yellow metal higher. Right now, real U.S. rates are negative, which cuts the opportunity cost of holding bullion, per Bloomberg.

2020 an Election Year

Investors should note that 2020 is a U.S. election year, which is likely to cause enough volatility in the market. Gold price normally gains 8.99% in an election year. In the previous election year too in 2016, GLD had gained about 8%.

Inflation Doesn’t Hurt Gold

The inflationary backdrop in the United States is muted at present. In its latest meeting, the Federal Reserve stressed on the importance of raising inflation to officials’ target. So, if inflation picks up at any point of time, there is no threat to gold as it is often viewed as a hedge against inflation (read: 6 Sector ETFs & Stocks to Watch on December U.S. Inflation).

What If China Fails to Meet Phase-One Trade Deal?

Economists expect China's economic growth to slip to 5% or even lower due to the coronavirus outbreak. Against this backdrop, it may be difficult for China to keep promises of buying plenty of American products and services (read: Phase-One Trade Deal to Boost These ETF Areas). 

Per the phase-one trade deal, China has vowed to purchase an additional $200 billion of American goods over the next two years — $52.4 billion worth of energy, $32 billion of agriculture, $37.9 billion of services and $77.7 billion of manufactured products. The incremental purchases were add-ons to the 2017 U.S. export numbers. If China fails to meet the promise, trade tensions may escalate (read: Sector ETFs to Watch Out for Until Phase-2 Trade Deal).

Return of Global Growth Worries

Trade war worries may have subsided a bit at the start of 2020 but fears of a global economic slowdown have returned. In spite of a strong U.S. economy and robust stock markets, more than half of the chief executive officers (CEOs) expect the global economic growth momentum to decelerate this year, per a survey done by PwC and released at the World Economic Forum in Davos, Switzerland.

Among 1,600 CEOs across 83 countries, 53% saw a decline in economic growth in 2020. Just a year ago, 57% expected an improvement in GDP growth. The latest fear of slowdown also compounded with the International Monetary Fund (IMF) slashing its global growth forecasts. The latest coronavirus attack aggravated the slowdown fears (read: Economic Slowdown in 2020? ETF Strategies to Help You).

ETFs in Focus

Against this backdrop, investors can keep track of regular gold ETFs like GLDiShares Gold Trust IAU, Aberdeen Standard Physical Swiss Gold Shares ETF SGOL and SPDR Gold MiniShares Trust GLDM and leveraged ETFs like VelocityShares 3x Long Gold ETN UGLD, DB Gold Double Long ETN DGP, ProShares Ultra Gold UGL, DB Gold Double Short ETN DZZ and VelocityShares 3x Inverse Gold ETN DGLD (see all precious metals ETFs here).

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VelocityShares 3x Long Gold ETN (UGLD): ETF Research Reports
 
Aberdeen Standard Physical Gold Shares ETF (SGOL): ETF Research Reports
 
DB Gold Double Short ETN (DZZ): ETF Research Reports
 
DB Gold Double Long ETN (DGP): ETF Research Reports
 
VelocityShares 3x Inverse Gold ETN (DGLD): ETF Research Reports
 
ProShares Ultra Gold (UGL): ETF Research Reports
 
SPDR Gold Shares (GLD): ETF Research Reports
 
iShares Gold Trust (IAU): ETF Research Reports
 
SPDR Gold MiniShares Trust (GLDM): ETF Research Reports
 
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