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Gold ETFs Are Having A Moment

ETF Professor

In the precious metals arena these days, gold and the related exchange traded funds are getting plenty of attention and rightfully so. Though it was flat Thursday, the iShares Gold Trust (NYSE: IAU) is up 10% this month and is one of several gold ETFs that has recently been flirting with or hitting 52-week highs.

What Happened

The $13.23 billion IAU is one of the largest gold ETFs in the world and holds over 9.4 million troy ounces of bullion in its trust, according to issuer data. IAU is up nearly 10% this year.

“Global investors have increased their positions in gold exchange traded funds (ETFs) by $4.3 billion from May 14th, one day after the S&P 500 Index’s 2.4% trade tension driven drop, through June 20,” said BlackRock in a recent note. “This pushed the year to date total of ETF flows into gold focused products back into positive territory.”

Why It's Important

One of the primary reasons gold is rallying is expectations that the Federal Reserve will cut interest rates at some point this year and that, in turn, will weaken the dollar. The Invesco DB US Dollar Index Bullish Fund (NYSE: UUP), which tracks the greenback against a basket of major developed market currencies, is down 1.63% this month.

“Gold’s performance at times of geopolitical volatility underscores its potential value as a portfolio diversifier,” said BlackRock. “However, gold has also performed well amid strong equity markets this year as real interest rates fell.”

Spot gold resides around $1,400 per troy ounce, a price area that if held, commodities market observers believe could usher in a new bull market for the yellow metal.

What's Next

Primary drivers of gold demand include global central banks, long-term investors, including those buying gold bars and coins and ETFs like IAU, and industrial users. However, short-term speculators remain important in driving gold prices.

“Still, a high proportion of annual demand for gold is based solely on investment demand,” according to BlackRock. “This can expose the price of the metal to a large amount of speculation. The World Gold Council data suggests that only 59% of demand is for commercial uses; 26% of 2018 gold demand was for investment purposes while another 15% was demanded by central banks.”

Disclosure: The author owns shares of IAU.

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