Gold prices hardly had a rally in the past month (down 0.8%) despite the growing coronavirus spread and the resultant crash in the global stock market. The S&P 500 declined about 33% past month and was obviously in a bear market. This, in turn, should have propelled a rally in the safe-haven asset gold, but it didn’t happen in reality.
Since the coronavirus-led lockdowns induced a different kind of crisis globally, investors rushed to hoard cash and sold almost everything. The need to meet daily expenses at the time of a coronavirus-imposed quarantine and lockdowns strengthened the urgency for cash holding.
This, in turn, boosted the value of the U.S. dollar.
Invesco DB US Dollar Index Bullish Fund ( UUP Quick Quote UUP - Free Report) added 3.1% in the past month. Stronger greenback went against the value of gold (read: U.S. Dollar Climbs: ETFs to Gain/Lose). Fed Support & U.S. Stimulus Deal to Boost Gold
The Fed on Mar 23 stated that the purchases of Treasury and mortgage securities that it approved a week ago are unlimited and that it will
buy $375 billion in Treasury securities and $250 billion in mortgage securities this week, per an article published on Wall Street Journal.
The Fed also confirmed
it will buy investment-grade exchange-traded funds that track the corporate bond market, “a first for the U.S. central bank,” per MarketWatch. However, the Fed cannot own more than 20% of any one ETF or 10% of individual corporate bonds. Investors should also note that the Fed cut rates to zero in March, matching its crisis-era policy (read: Must-Watch ETF Areas on 2nd Fed Rate Cut of 2020 & QE Launch).
Along with the Fed, there is the
U.S. stimulus worth about $2 trillion. This fat incentive was meant to finance hospitals, businesses and Americans. This should inject ample liquidity into the U.S. economy, pulling down the greenback. The fund UUP already lost 1.1% on Mar 24, which in turn, should favor gold prices. Gold bullion ETF SPDR Gold Shares ( GLD Quick Quote GLD - Free Report) gained 4.9% on Mar 24.
The U.S. government’s stimulus package led Goldman Sachs to forecast an “
inflection point” for gold and the investment house is now endorsing the commodity, per an article published on Bloomberg (read: Beyond Coronavirus, What's Driving Gold ETFs?).
Not only the Fed, most developed and emerging economies have been on a policy easing mode, offering a hefty stimulus to fight the novel coronavirus. The ECB and the BoJ have benchmark interest rates in negative territory. Right now, real 10-year U.S. treasury yield is negative and this lowers the opportunity cost of holding a non-interest-bearing asset like bullion.
ETFs in Focus
Against this backdrop, investors can bet on regular gold ETFs like
GLD, iShares Gold Trust ( IAU Quick Quote IAU - Free Report) , Aberdeen Standard Physical Gold Shares ETF ( SGOL Quick Quote SGOL - Free Report) and SPDR Gold MiniShares Trust ( GLDM Quick Quote GLDM - Free Report) (see all precious metals ETFs here).
Investors should also note that GLD costs 9.44 times of GLDM per share at the current level. So, GLDM may be a better bet if you want to put small dollar amount of money in gold or
if you are a retail investor , or facing some issues like cash crunch. However, each share of GLDM represents 1/100 while the same of GLD represents about 1/10 th of an ounce of gold th of an ounce of gold. Want key ETF info delivered straight to your inbox?
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