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Gold ETFs to Gain on Omicron & Inflation?

·3 min read

Gold bullion ETF SPDR Gold Shares GLD was up 17.6% in 2019 and 24.4% in 2020. So far this year, the bullion ETF has lost 6.3% against 25.2% gains in the S&P 500. While the start of the year hasn’t been great, the end could leave the yellow metal in the green as the demand for safe-haven assets has increased due to the Omicron variant of COVID-19. Let’s delve a little deeper.

Omicron Scare and Rising Demand for Safe-Havens

The infection of a new coronavirus strain, namely Omicron, is found to have a much bigger impact on Wall Street than expected. Europe enacted lockdown last week due to rising virus cases that started making global investors unnerved. Cases of the new variant were found in Hong Kong, Belgium and Tel Aviv as well as in major South African cities like Johannesburg.

The World Health Organization called the new variant “highly transmissible.” As a result, Wall Street had a bloodbath on Nov 26 with the Dow Jones Industrial Index losing 2.53% in its worst post-Thanksgiving Day performance since 1931.

The S&P 500 and the Nasdaq Composite posted their worst-ever returns post-Thanksgiving Day. The Russell 2000 lost 3.67% on Nov 26. Crude oil retreated 13% on that day. Investments that gain on economic reopening took a hit last week.

All these raised worries regarding the sustainability of economic recovery from the pandemic-led slump. The flight to safety brought down the U.S. treasury yield to 1.48% on Nov 26 from 1.64% the day before. The Fed’s future policy action is also jeopardized.

Notably, the Fed has announced that it will start QE tapering from November 2021. Many market watchers had previously expected a hike in rates in mid-2022. But the Omicron news has quelled those chances.

Per CME group data, the chance of a 50-bp rate hike in June 2022 is 44.1% now, down from a 46.7% probability recorded a week ago. This means that rates are likely to remain low in the coming days due to the safe-haven rally and a dovish Fed, which in turn should work well for the non-interest-bearing assets like gold.

Rising Inflation a Plus for Gold

If this was not enough, inflationary pressure has been palpable across the globe with the United States and Europe due to supply chain issues. Gold is historically viewed as a hedge against inflation. Moreover, higher inflation is feared to weaken corporate earnings, which in turn, would hurt equity prices. In such a scenario, gold may gain as an alternative investment (read: ETF Trades to Combat Hot Inflation Data).

Gold: An Undervalued Asset?

Gold is now a relatively cheap investment opportunity with losses so far in 2021. If the equity rally halts and corrects ahead on Omicron or overvaluation concerns, one may find safety in gold investing.

ETFs in Focus

GLD, GraniteShares Gold Trust BAR, iShares Gold Trust IAU, Aberdeen Standard Physical Swiss Gold Shares ETF SGOL and SPDR Gold MiniShares Trust GLDM.

Bottom Line

Having said this we would like to highlight that all depends on the progress and efficacy of vaccines and treatments. If these are found to beat the Omicron variant, gold may not take an upper hand over equities.


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SPDR Gold Shares (GLD): ETF Research Reports
 
iShares Gold Trust (IAU): ETF Research Reports
 
Aberdeen Standard Physical Gold Shares ETF (SGOL): ETF Research Reports
 
GraniteShares Gold Trust (BAR): ETF Research Reports
 
SPDR Gold MiniShares Trust (GLDM): ETF Research Reports
 
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Zacks Investment Research