Back to top

Image: Bigstock

Gold ETFs Likely to Rule 2H Irrespective of Fed Rate Cut

Read MoreHide Full Article

Gold prices are hovering around a six-year high currently and may hit more highs in the coming days. The yellow metal is set to record the best monthly gain of 9.49% since February 2016, per A subdued greenback amid talks of Fed policy easing and geopolitical tensions have propelled the yellow metal higher in the past month.

However, after a sturdy month-long rally, gold is now into a short-term overbought condition and is thus due for a correction. This is especially true given that Fed Chair Powell has dimmed the prospects of a near-term rate cut in the recent session. On Jun 25, Powell said that the central bank is “insulated from short-term political pressures.”

Separately, St. Louis Fed President James Bullard told Bloomberg Television that the U.S. economy is not awful enough to require a 50-basis-point cut in July. Such comments led the greenback to gain strength, which could act as a weakness to gold investing in the near term.

Still, the second half of the year looks bright for gold investing. Gold is likely to touch $1550 (from the current level of $1409) in the next few months, per an analyst. Below we highlight why (read: Go for Safe-Haven ETFs Amid Rising Geopolitical Risks).

Why Gold Could Rally in 2H

The Fed Chair acknowledged the downside risks related to U.S. tariffs and weak inflation in the recent session.As of Jun 25, according to CME FedWatch tool, there is a 64.2% chance of a 50-bp rate cut in the Sep 18 meeting, followed by a 29.6% probability of 75-bp rate cut and 16.1% likelihood of a 25-bp rate cut. Even if the Fed doesn’t cut rates, it would at least not hike that. So, overall easy policy would support gold prices.

Investors should note that stocks have rallied in recent times in anticipation of a hefty rate cut. Now, if the Fed reacts in a different way, we expect to see a short-term slide in the stock market. And if that happens, safe-haven asset gold would spring higher.

Of late, geopolitical tensions between Iran and the United States flared up after officials from both countries said Iran downed a U.S. military drone near the Strait of Hormuz. In any case, both parties have been at loggerheads for about a year. Most recently, President Donald Trump announced that the United States will levy "major" incremental sanctions on Iran in order to prevent it from procuring nuclear weapons. This kind of geopolitical tension is another tailwind for gold rally (read: Iran Downs U.S. Drone: Sector ETFs & Stocks to Gain).

U.S.-China relations are also sour. Just before the G-20 meet where Trump and China’s premiere Xi are supposed to talk about trade, five additional Chinese companies are barred from purchasing U.S.-made components. Analysts believe that chances of a more comprehensive deal appear far-off. This is yet another reason for a likely spurt in safe havens (read: 3 Low-Volatility Stocks & ETFs to Buy).

Central banks’ gold buying is yet another strength. Some of these contributed to a 7% rise in global gold demand in the first quarter from a year earlier, according to the World Gold Council, published on Financial Times. Russia was the biggest buyer during the period, followed by China. The momentum carried on in the second quarter too.

ETFs in Focus

Against this backdrop, investors can keep track of regular gold ETFs like SPDR Gold Trust GLD, iShares Gold Trust IAU, Aberdeen Standard Physical Swiss Gold Shares ETF SGOL and SPDR Gold MiniShares Trust GLDM and leveraged ETFs like VelocityShares 3x Long Gold ETN UGLDDB Gold Double Long ETN (DGP), ProShares Ultra Gold UGLDB Gold Double Short ETN (DZZ - Free Report) and VelocityShares 3x Inverse Gold ETN (DGLD) (see all precious metals ETFs here).

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>

In-Depth Zacks Research for the Tickers Above

Normally $25 each - click below to receive one report FREE:

DB Gold Double Short ETN (DZZ) - free report >>