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Powell Pushes Gold ETFs Higher... Sort Of

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Powell Pushes Gold ETFs Higher... Sort Of
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The SPDR Gold Shares (NYSE: GLD) and rival gold-backed exchange traded funds traded modestly higher Wednesday after Federal Reserve Jerome Powell said interest rates are close to “neutral.”

Three interest rate hikes this year and the subsequently stronger dollar are among the most widely cited reasons for explaining gold's struggles this year.

What Happened

GLD, the largest gold ETF by assets, entered Wednesday with a year-to-date loss of 7 percent before gaining 0.37 percent on above-average volume.

“Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy--that is, neither speeding up nor slowing down growth,” Powell said in a speech at The Economic Club of New York.

Why It's Important

Higher interest rates are seen as a drag on gold because the yellow metal and the related ETFs don't pay a coupon or interest, leaving little incentive for income-starved investors to embrace bullion in rising rate environments.

Still, GLD has been a solid performer for the bulk of the Fed's current tightening cycle. Over the past three years, a period in which the Fed has hiked rates eight times, GLD is up about 12.4 percent while the dollar is flat.

Even with Powell's somewhat bullish comments, markets are pricing in an almost 83 percent of another interest rate increase next month, according to CME Group data. Some investors are bullish on gold for 2019.

According to Legg Mason's Global Investment Survey 2018, “23 percent of investors said that they see gold as one of the best investment opportunities next year, unchanged from 2017,” reports Kitco News.

What's Next

A sustained rally for gold could lift downtrodden gold miners stocks and ETFs, assets that are dirt cheap on valuation but vulnerable to gold lagging other investments.

The VanEck Vectors Gold Miners ETF (NYSE: GDX), the largest gold miners ETF, gained 2.49 percent yesterday, adding to a modest fourth-quarter gain.

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