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Gold Hits 6 Year High, ETF Investors Yawn

Sumit Roy

Stocks and bonds have received a big boost following last week’s Fed meeting—the S&P 500 hit a record high, while the Barclays Aggregate Index reached its loftiest level ever on Thursday—but they aren’t the only assets delighting in the Federal Reserve’s recent dovish shift.

Gold also zoomed higher, juicing returns for gold-related ETFs. The $33 billion SPDR Gold Trust (GLD) is now up 8.8% year to date, with all of those gains coming just this month.

Gold prices, which broke through $1,400/oz for the first time in six years last week, may have more room to run as the Fed and other central banks around the world ease monetary policy.
 


Spot Gold Price

 

Tightening Cycle Ends

In many ways, last Wednesday’s Fed decision was the moment the gold market has been waiting a long time for. For 3 ½ years, gold has had to watch as the U.S. central bank steadily increased interest rates, bolstering the dollar and making safe haven alternatives like Treasuries much more appealing to investors.

But after the Fed’s dovish shift, that steady stream of rate hikes is all but history, and opens the door for rate cuts sometime this year. Indeed, Fed funds futures markets suggest the central bank will slash rates as soon as July. That could be followed by one or two additional cuts later this year as the Fed tries to cushion the U.S. economy from the negative impact of the U.S.-China trade war and the global economic slowdown.

All this is music to the ears of gold bulls. If the path for interest rates is anywhere close to what the market envisions, the safe haven yellow metal begins to look much more attractive.

Bullish Catalysts Piling Up

Lower interest rates and an associated lower U.S. dollar (the Dollar Index fell to a three-month low last week) are seen as bullish cues for gold.

So too is economic uncertainty—and there’s no shortage of that with trade wars raging and economic growth slowing from China to Australia to the U.S.

If central banks around the world are able to orchestrate a soft landing in their economies, gold is probably closer to a top than not right now. But if growth keeps slowing and rates keep falling, the gold rally may just be getting started.

After all, the yellow metal performed phenomenally during and after the recession that ravaged the world economy a decade ago. Buyers of gold today may be betting on similar performance if things go awry this time around.

ETFs Not The Driver

Interestingly, unlike in other years, this year’s gold-buying spree hasn’t come from ETF investors. Exchange-traded funds, in fact, have been modest net sellers of gold in 2019.

Much of that selling has come from the aforementioned GLD, which has seen year-to-date outflows of $945 million. On the other hand, cheaper competitors to GLD, such as the iShares Gold Trust (IAU), the SPDR Gold MiniShares Trust (GLDM) and the GraniteShares Gold Trust (BAR) have garnered inflows of a combined $828 million.

Annual fees for those funds range from 0.17% to 0.25%, below the 0.40% for GLD—something that seems to be resonating with longer-term holders who aren’t as swayed by the latter’s superior liquidity.

Miners Shunned

ETF investors’ relative lack of interest in gold this year has extended outside the physically backed funds into gold miner funds as well.

The VanEck Vectors Gold Miners ETF (GDX) faced outflows of $1.9 billion so far this year; the VanEck Vectors Junior Gold Miners ETF (GDXJ) rang up outflows of $769 million; and the Direxion Daily Gold Miners Index Bull 3X Shares (NUGT) had outflows of $398 million.

Though they’ve perked up this year, miners—along with the rest of the commodity producer complex more broadly—have fallen sharply out of favor with investors.

GDX and GDXJ are up 19.5% and 13.7% year to date, respectively. On the other hand, they are down 30.3% and 56.7%, respectively, over the past 10 years.

It will take much more than a one-month run in gold prices to turn sentiment around for this downtrodden group.

Email Sumit Roy at sroy@etf.com or follow him on Twitter @sumitroy2

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