Market Overview

Go-Go Days For Gold ETFs

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Go-Go Days For Gold ETFs

The SPDR Gold Trust (ETF) (NYSE: GLD) and the iShares Gold Trust(ETF) (NYSE: IAU) are each up more than 20 percent this year. Not only that, but the two gold exchange-traded funds are raking in new assets at a fevered pace.

Gold's Golden Promises

GLD, the world's largest gold ETF, has seen $8.1 billion of inflows this year, while investors have poured $1.7 billion into IAU. The aforementioned return and flows data would usually be enough to have many market observers waxing bearish on bullion. To be sure, there are plenty doing just that, but gold does not lack for supporters, either.

Related Link: Are Central Bankers To Thank For The Surge In Gold Prices?

Last month, the Federal Reserve opted against boosting interest rates, leaving many market participants feeling that the odds of the central bank raising borrowing costs four times this year, as many thought would be the case heading into 2016, are rapidly dwindling.

The Fed's reluctance to boost borrowing costs to this point in 2016 is applying pressure to the dollar, sending the U.S. Dollar Index lower by almost 4.6 percent. That is good for dollar-denominated gold, as the easy money policies are enacted by a host of developed world central banks beyond the Fed.

Does An 'Ideal' Gold Environment Even Exist?

“Some environments have been more kind to gold than others. As gold pays no interest or dividend, the opportunity cost of holding the precious metal is a critical driver of returns. During periods of low or negative real rates, when the opportunity cost is low, gold has generally performed better than in periods when real rates are higher,” said Russ Koesterich, head of asset allocation for BlackRock’s Global Allocation Fund, in a recent note.

Gold often falls out of favor when investors chase stocks when stocks are hot, but popular equity-based broad market ETFs are dithering this year.

Related Link: China Is Buying One Of London's Largest Gold Vaults

For gold bugs, there is nothing wrong with safe-haven demand and 2016's market action is, to this pointing, reminding investors of gold's utility. In fact, gold has proven its mettle during market crises ranging from the Soviet sovereign debt crisis to the Long Term Capital Management meltdown to the global financial crisis.

“Given slow growth, a cautious Federal Reserve and the proliferation of negative sovereign yields in Japan and Europe, U.S. real rates are likely to remain low for the foreseeable future. At the same time, both core inflation and wages have been firming while the inflation drag from last year’s strong dollar and collapse in oil is beginning to fade. This is exactly the type of environment that has historically been most favorable to gold,” added Koesterich.

Disclosure: Todd Shriber owns shares of IAU.

Posted-In: Blackrock commodities ETFsLong Ideas Specialty ETFs Commodities Markets Trading Ideas ETFs Best of Benzinga

 

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