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Why Gold ETFs Can Bounce Back

This article was originally published on ETFTrends.com.

The iShares Gold Trust (IAU) and other gold-backed ETFs are stumbling this month as equities do the same, but some market observers believe gold ETFs can generate more upside.

Gold bulls in particular see momentum after the Federal Reserve officials hinted at a more dovish stance on interest rates for this year. According to Fed fund futures, options traders were betting on a 9% chance rates will fall this year and 91% are betting on an unchanged interest rate outlook.

“The precious metal has benefited from a few themes, specifically a range-bound dollar and lower real rates (in other words, after inflation),” said BlackRock in a recent note. “With the economy decelerating and the Federal Reserve apparently on hold, real interest rates have fallen sharply. The yield on U.S. 10-Year Inflation Protected Securities (TIPS) is down 25 basis points (bps, or 0.25%) since the end of last year, putting U.S. real yields back to where they were in late August.”

What's Next for Gold

Ongoing concerns over the health of major economies, notably in Europe, have pressured global rates this year, sending yields on many conservative fixed-income assets down. Meanwhile, the non-yielding gold looks more attractive in the more muted interest rate environment since lower rates diminish the disadvantages of holding non-yielding physical assets.

“The drop in real yields explains much of gold’s resiliency. Historically, changes in real yields explain approximately 20% of the variation in gold returns. For every one basis point (1/100 th of a percent) drop in real yields gold has typically gained about 0.10%. The 3% year-to-date advance in gold is completely consistent with the recent drop in real interest rates,” according to BlackRock.

Related: Gold, Silver, Precious Metals Miners ETFs Climb

According to the World Gold Council, gold-backed exchange traded funds saw almost 72 tons of inflows last month, exceeding their total for all of 2018, as investors continued to dive into gold investments.

“Investors have consistently bid up stocks and pushed volatility lower on the assumption that the Fed is on hold,” said BlackRock. “For volatility to remain this low will require a Goldilocks-like combination of modest but solid growth with a Fed content to leave rates where they are. Any other scenario is likely to see volatility rise, traditionally when gold really adds value.”

For more information on the gold markets, visit our gold category .