As economic conditions in the U.S. and around the globe continue to deteriorate, some of the best ETFs like SPDR Gold Shares (NYSEARCA:GLD) become increasingly important holdings for a diversified portfolio.
In the first half of 2019, investors were rewarded for taking market risk. But the second half could be a completely different story. As I cautioned in my March installment for the best ETFs in 2019, this year may be “a tale of two markets, as economic indicators point to eroding conditions as the year progresses.”
Why GLD Is Among the Best ETFs
If GLD is not the best ETF for 2019, it will certainly rank among the best holdings for a diversified portfolio in the year. Since price movement for gold bullion has such a low correlation with broad stock market indices, such as the S&P 500 index, gold ETFs that passively track the precious metal make great hedging tools. When stock prices fall, gold prices will commonly rise. But the factors that influence the price of gold are not that simple.
Here are the key factors that impact the price of gold and how they support GLD in 2019:
- Monetary Policy & Fed Speak: As the Federal Reserve increasingly evolves into a dovish tone, investors increasingly flock to safe-havens such as gold and bonds. Although the Fed’s hints at lower rates help to support stock prices in real time, the underlying indicator is a weakening economy, which points to more support for gold and bonds in the coming months.
- Economy: Speaking of the Fed and interest rates, the 10-year yield dipped below 2% for the first time in three years, indicating that the bond market has begun to price in a recession in the U.S. The trade war with China also continues to place downward pressure on GDP, placing a larger question mark over the direction of the U.S. economy.
- Uncertainty: Perhaps the greatest enemy of stock prices is uncertainty, whether it comes from the future direction of the economy or geopolitical uncertainty, which has recently intensified with escalating tensions between the U.S. and Iran. When investors are uncertain, they tend to rotate out of risk assets and into safe havens, such as gold and bonds.
As the second quarter of 2019 was winding to a close, stock prices were hitting all-time highs even as gold and bond prices pushed to multi-year highs. In translation, stock investors are betting on a stronger economy ahead while the gold and bond markets are indicating weakness. Only time will tell which argument will win. If Q2 2019 is any indication, gold has the momentum as GLD was up 9% and the SPDR S&P 500 (NYSEARCA:SPY) was up 3% for the quarter, coming into the final week of June.
With that said, the smart money won’t place any big bets in any one asset or investment security. Instead, a stronger portfolio structure can be the best move now. Under-weighting stocks and over-weighting gold and bonds will likely prove to be the best play in the second half of 2019.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. However, he holds GLD and SPY in some client accounts. Under no circumstances does this information represent a recommendation to buy or sell securities.