U.S. markets closed

After a Moderate Q1, What Lies Ahead for Gold ETFs in Q2?

Sanghamitra Saha

Gold had a decent first quarter, thanks to an equity market crash and the resultant safe-haven rally. Middle-East tensions and the coronavirus outbreak kept global markets edgy since the start of the year. Gold bullion ETF SPDR Gold Shares GLD has added about 6.8% so far this year. The global stash of gold in exchange-traded funds touched the highest level in seven years in the middle of the first quarter (read: Beyond Coronavirus, What's Driving Gold ETFs?).

The Q1 performance was moderate for bullion as the greenback strength capped gains of the bullion. Investors should note that U.S. dollar ETF Invesco DB US Dollar Index Bullish Fund UUP is up 5.1% this year (as of Apr 6) as need for cash amid the pandemic boosted demand for greenback materially.

What Lies in Q2?

Gold futures topped $1,700 an ounce to the highest since 2012 on rollout of massive stimulus. The unprecedented amount of global stimulus has been injected into the financial system, with the Fed taking the anchoring position. The Fed cut rates to zero and launched a fresh set of stimuli on Mar 23.

The Fed said that the purchases of Treasury and mortgage securities are unlimited. Among other steps, the Fed confirmed it would buy investment-grade exchange-traded funds that track the corporate bond market, a first for the U.S. central bank (read: All-Out Fed Support: Buy Highly-Rated Corporate Bond ETFs).

Along with the Fed, there is the U.S. stimulus worth about $2 trillion. This should inject ample liquidity into the U.S. economy, keeping the greenback strength at check. The U.S. government’s stimulus package led Goldman Sachs to forecast an “inflection point” for gold and the investment house is now endorsing the commodity, per an article published on Bloomberg.

Not only the Fed, most developed and emerging economies have been on a policy easing mode, offering a hefty stimulus to fight the novel coronavirus. The ECB and the BoJ have benchmark interest rates in the negative territory. Right now, real 10-year U.S. treasury yield is negative and this lowers the opportunity cost of holding a non-interest-bearing asset like bullion.

“Gold prices tend to rise when the fiscal deficit as a percent of GDP is rising,” per an analyst. “Some expect the deficit to expand by a much greater degree in the current crisis than it did a decade ago as a result of the combination of record fiscal stimulus paired with falling revenue. If so, gold would very likely break out above the high it set in 2011,” the analyst commented.

Any Glitches Ahead?

Having said all, we would like to note that there are some headwinds too. Logistics issues are also cropping up. A South African refinery said gold shipments to London have been interrupted because of lack of commercial flights, dealing a blow to the physical bullion market, though the company is planning to resort to chartered planes.

DoubleLine CEO and Wall Street's Bond King Jeffrey Gundlach indicated that buying “paper gold [ETFs] could be a huge failure in entire gold-delivery system” as there is not sufficient physical gold to meet all the paper demand.

While flight issues will keep acting as a hurdle in Q2, production turmoil will ease as three key plants in the Swiss canton of Ticino, Europe’s biggest gold-refining hub, received permission from local authorities to run operations at a restricted rate. The plants were locked down for about two weeks due to the virus outbreak.

Overall, with tailwinds and headwinds weighing on both sides, we expect a moderately strong Q2 for gold ETFs. However, a few analysts are projecting that gold may top $2,000-mark (marking about 16% jump from the current level), thanks to the massive central bank stimulus, which could boost inflation. And gold is normally viewed as an inflation-protected asset.

ETFs in Focus

Against this backdrop, investors can bet on regular gold ETFs like GLDiShares Gold Trust IAU, Aberdeen Standard Physical Gold Shares ETF (SGOL and SPDR Gold MiniShares Trust GLDM (see all precious metals ETFs here).

Investors should also note that GLD costs 9.44 times of GLDM per share at the current level. So, GLDM may be a better bet if you want to put small dollar amount of money in gold or if you are a retail investor, or facing issues like cash crunch. However, each share of GLDM represents 1/100th of an ounce of gold, while the same of GLD represents about 1/10th of an ounce of gold.