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Gold Bullion and the GLD ETF Have Serious Tailwinds Now

GLD has lost some luster this year, but the benchmark gold ETF can shine again

If ever there was a time for safe-haven assets, this it. But the SPDR Gold Shares (NYSEARCA:GLD) is betraying its shelter-from-the-storm reputation as GLD stock has been sliding lower this month alongside equities.

With Gold Price on the Rise, is March the Month for Kinross Gold Stock?
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To be sure, GLD has been much less worse than the S&P 500 this month. The former is down just 3% while the latter is off more than 25% in March. That’s a stunning reversal considering that gold was one of the best-performing commodities in 2019. GLD stock jumped almost 18% in the last year.

One of the primary reasons investors tap gold in rough markets is that it’s usually less volatile and loosely correlated to equities. Yet, GLD has been volatile in 2020. The exchange-traded fund was sporting a year-to-date loss of 3.4% until March 19. Now it’s up 7.3% for the year.

There are several factors weighing on the yellow metal and its associated funds such as GLD. First, with few safe havens left, the dollar is soaring. The Invesco DB US Dollar Index Bullish Fund (NYSEARCA:UUP) is higher by 6.4%. Gold is denominated in dollars and its relationship to the greenback is usually inverse.

Second, as the World Gold Council (WGC) notes, gold has been plagued by selling in the derivatives market, not by ETF investors leaving the likes of GLD.

Bad News Could Turn Good

This isn’t the first time gold has joined stocks during times of extreme market duress. It also happened during the Great Recession. But there remain compelling reasons to own gold, including global central banks’ insatiable appetite for bullion. Last year, central bank bullion buying hit a 50-year high thanks to the likes of China, Russia and Turkey, among others.

Speaking of central banks, the Federal Reserve recently took interest rates to near zero. Lower interest rates typically benefit gold (see 2019 when the Fed cut three times) because the yellow metal and ETFs such as GLD don’t pay interest. As BlackRock points out, changes in real interest rates are important drivers of gold prices.

“During the past decade, changes in real interest rates have explained more than 30% of the change in the price of gold,” said the asset manager. “As a rough rule of thumb, every 0.10% drop in real rates coincides with about a 1.25% increase in gold.”

Indeed, negative rates around the world and a slew of central banks unleashing more easing are factors that could support gold in a slow growth environment. Year-to-date, 30 central banks have cut rates and/or engaged in some form of quantitative easing.

“We believe the deceleration in economic growth will undoubtedly impact gold consumer demand and gold’s volatility may remain high, but high risk levels combined with widespread negative real rates and quantitative easing will be supportive of gold investment demand as a safe haven,” wrote the WGC.

The Bottom Line on GLD

Over the next several months, particularly if a recession takes hold and inflation remains low, gold prices could be challenged. And gold prices will almost certainly be volatile.

However, the backdrop of rampant monetary easing and currency debasement outside the U.S. bodes well for GLD stock.

For long-term, cost-conscious investors looking to get involved with the yellow metal, the SPDR Gold MiniShares (NYSEARCA:GLDM) is an ETF to consider. GLDM charges 0.18% per year, or $18 on a $10,000 investment, well below GLD’s 0.4% expense ratio.

Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold any of the aforementioned securities. 

Article printed from InvestorPlace Media,

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