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It’s been a banner year for gold and the related exchange traded funds. As of the end of the September, the advantage over the S&P 500 enjoyed by the SPDR Gold Shares (NYSEARCA: GLD) – the largest ETF in the category – was 680 basis points.
Indeed, a good portion of that performance is attributable to speculation that the Federal Reserve would lower interest rates, which it did last month. Due to the fact that gold and ETFs like GLD don’t pay dividends or interest, bullion is often viewed as a less attractive investment when Treasury yields are elevated. Now that the much anticipated rate cut has been delivered, it might be reasonable to expect that near-term upside for gold is limited.
That could prove accurate and there’s nothing wrong with some profit-taking, but while is likely near-term overbought, its long-term prospects remain appealing. So does the outlook for the coming months and interest rates could again act as catalysts.
Consider the following. The Fed already pared rates by 50 basis points, but that implies another 100 basis points are likely to come off the Fed funds rate by the start of the second quarter of 2025. Fed funds futures imply further cuts by June 2025. Fortunately, there’s more to gold’s story than interest rates.
Correlations Make Gold Attractive
Lack of correlations that is. At a time when advisors are grappling to find assets that aren’t highly correlated to one another, gold stands out. The yellow metal’s correlation to U.S. stocks is -0.3%, according to Bank of America Global Research, underscoring its strong hedging potential.
““Gold is also the quintessential inflation hedge,” points out Bank of America. “In the 20th century, inflation across G7 economies averaged 5%. Between 2000 and 2020, the average rate was 2%. We regard the ‘2% world’ of macro stability and low inflation as a brief interregnum in an otherwise more volatile world. Trends in demographics, debt, tech disruption, and de-globalization all suggest a secular shift back to a 5% world.”
Even with those clear advantages, gold remains under-owned among retail investors, indicating advisors have plenty of latitude with which to discuss the asset’s advantages with clients.
“Retail has missed the gold rally for the first time since GLD's inception. We're tracking $25bn of physical gold ETF outflows since buying peaked in October 2020,” adds BofA. “Any pullback in prices could be relatively short-lived as ETF investors see opportunities to gain exposure. We estimate that most GLD investors bought in around $188 (i.e., spot gold around $2050).”
The Other Reason Central Banks Matter
When it comes to gold and central banks, the former is often viewed through the lens of what the Fed has up its sleeve. Obviously, there are other important central banks in the world and they’re relevant in the gold conversation because many are fans of gold.
That is to say many central banks are stockpiling the yellow metal, they have been for years and are likely to continue doing so.
“Nevertheless, support for prices is clear. Global central banks are on pace to have bought >3,000 tons from 2022 to the end of this year, the fastest clip in history,” concludes Bank of America. “Central bank buying broke the old models of gold prices, as real rates are no longer a reliable indicator. But the PBoC stopped buying between $1,900 and $2,000 and retail investors have sold $25bn of gold ETFs since October 2020. Heavy demand from central banks and light retail positioning should provide support in a sell-off.”
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