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Gold Hits Record High: 5 Reasons ETFs Could Rally Further
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Gold hit a record as markets are bracing for global interest rates to fall. The price of gold was buoyed by the potential for U.S. monetary policy easing, increased geopolitical tensions and purchases by central banks. Gold bullion ETF SPDR Gold Trust (GLD - Free Report) is up 19.7% this year and has advanced 25.7% past year. We believe the long-term prospects for gold prices are even bullish. Here’s why.
Falling Gold Mining Output?
John Reade, chief market strategist at the World Gold Council, told CNBC last month that while there was a notable 4% year-on-year increase in mine production during the first quarter of 2024, the broader trend indicates a plateauing of production from 2016 to 2018, with no significant growth observed thereafter.
Mine production nudged up 0.5% year over year in 2023, gained 1.35% in 2022, grew 2.7% in 2021 and recorded the first decline (down 1%) in a decade in 2020. WGC chief believes that gold’s decade-long growth story that started in 2008 is showing a downtrend. New gold deposits are also becoming scarce.
Fed to Cut Rates in September?
The Fed has indicated one rate hike this year. The odds of a rate cut in September rose due to the cooling in inflation and the labor market. There is currently a 93.3% probability of a 25-bp rate cut in September, up from 62% recorded one month ago, according to the CME FedWatch Tool.
This indicates that inflation is cooling in the United States which may goad the Fed to cut rates soon. If the Fed eases policy, the greenback will likely lose strength and bond yields will fall. Both factors should go in favor of gold investing.
Trump Assassination Attempt
The recent assassination attempt on Republican candidate Trump has reignited “Trump Trade.” Trump is known to favor low interest rates. As a result, assets that perform better in a low interest rate environment gained traction. Gold, being a non-interest-rate-bearing asset, thus has reasons to rally.
Trump’s previous era was known for trade war and geopolitical tension. In any case, political tensions are likely to be in place in the United States due to the presidential election this year. These are scenarios when safe-haven assets like gold get a boost. Some analysts also believe that Trump's tariff and tax policies could boost inflation again, deepen the budget deficit and favor inflation-protecting assets like gold.
Central Banks Buying More Gold
Central banks in emerging markets are seeking to lower reliance on the U.S. dollar for reserves holdings and are intending to hedge against inflation. The People’s Bank of China (PBoC) wore the crown for the largest single gold buyer, as it reported a total rise of 225 tons in its gold reserves in 2023. This marked 2023 as the country’s highest single year of reported additions since at least 1977.
Global central banks’ gold buying lifted annual (net) demand to 1,037 tons in 2023, just short of the record of 1,082 tons set in 2022. Two back-to-back years of more than 1,000 tons of buying is proof of the recent strength in the central bank's demand for gold.
Central bank net demand totaled 290 tons in Q1 of 2024 — the strongest start to any year on record, per World Gold Council. India, China and Turkey are loading up gold.
Anticipation of Increased ETF Demand
Some analysts anticipate that gold exchange-traded fund (ETF) holdings will rise once the Fed implements interest rate cuts. They believe ETF demand could increase significantly as interest rate adjustments typically influence these buyers.
Image: Bigstock
Gold Hits Record High: 5 Reasons ETFs Could Rally Further
Gold hit a record as markets are bracing for global interest rates to fall. The price of gold was buoyed by the potential for U.S. monetary policy easing, increased geopolitical tensions and purchases by central banks. Gold bullion ETF SPDR Gold Trust (GLD - Free Report) is up 19.7% this year and has advanced 25.7% past year. We believe the long-term prospects for gold prices are even bullish. Here’s why.
Falling Gold Mining Output?
John Reade, chief market strategist at the World Gold Council, told CNBC last month that while there was a notable 4% year-on-year increase in mine production during the first quarter of 2024, the broader trend indicates a plateauing of production from 2016 to 2018, with no significant growth observed thereafter.
Mine production nudged up 0.5% year over year in 2023, gained 1.35% in 2022, grew 2.7% in 2021 and recorded the first decline (down 1%) in a decade in 2020. WGC chief believes that gold’s decade-long growth story that started in 2008 is showing a downtrend. New gold deposits are also becoming scarce.
Fed to Cut Rates in September?
The Fed has indicated one rate hike this year. The odds of a rate cut in September rose due to the cooling in inflation and the labor market. There is currently a 93.3% probability of a 25-bp rate cut in September, up from 62% recorded one month ago, according to the CME FedWatch Tool.
This indicates that inflation is cooling in the United States which may goad the Fed to cut rates soon. If the Fed eases policy, the greenback will likely lose strength and bond yields will fall. Both factors should go in favor of gold investing.
Trump Assassination Attempt
The recent assassination attempt on Republican candidate Trump has reignited “Trump Trade.” Trump is known to favor low interest rates. As a result, assets that perform better in a low interest rate environment gained traction. Gold, being a non-interest-rate-bearing asset, thus has reasons to rally.
Trump’s previous era was known for trade war and geopolitical tension. In any case, political tensions are likely to be in place in the United States due to the presidential election this year. These are scenarios when safe-haven assets like gold get a boost. Some analysts also believe that Trump's tariff and tax policies could boost inflation again, deepen the budget deficit and favor inflation-protecting assets like gold.
Central Banks Buying More Gold
Central banks in emerging markets are seeking to lower reliance on the U.S. dollar for reserves holdings and are intending to hedge against inflation. The People’s Bank of China (PBoC) wore the crown for the largest single gold buyer, as it reported a total rise of 225 tons in its gold reserves in 2023. This marked 2023 as the country’s highest single year of reported additions since at least 1977.
Global central banks’ gold buying lifted annual (net) demand to 1,037 tons in 2023, just short of the record of 1,082 tons set in 2022. Two back-to-back years of more than 1,000 tons of buying is proof of the recent strength in the central bank's demand for gold.
Central bank net demand totaled 290 tons in Q1 of 2024 — the strongest start to any year on record, per World Gold Council. India, China and Turkey are loading up gold.
Anticipation of Increased ETF Demand
Some analysts anticipate that gold exchange-traded fund (ETF) holdings will rise once the Fed implements interest rate cuts. They believe ETF demand could increase significantly as interest rate adjustments typically influence these buyers.
Gold ETFs in Focus
SPDR Gold MiniShares Trust (GLDM - Free Report) , iShares Gold Trust (IAU - Free Report) , iShares Gold Trust Micro (IAUM - Free Report) , GraniteShares Gold Trust (BAR - Free Report) and Goldman Sachs Physical Gold ETF (AAAU - Free Report) are thus primed for gains.