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 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 (NYSE:GLD) (TSXV:GLD) gained 4.9% on Mar 24.
The U.S. government’s stimulus package led Goldman Sachs (NYSE:GS) 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, Aberdeen Standard Physical Gold Shares ETF SGOL and SPDR Gold MiniShares Trust (TSXV:GLD) (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 1/100th of an ounce of gold while the same of GLD represents about 1/10th of an ounce of gold.
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SPDR Gold Shares (GLD): ETF Research Reports
iShares Gold Trust (IAU): ETF Research Reports
Aberdeen Standard Physical Gold Shares ETF (SGOL): ETF Research Reports
Invesco DB US Dollar Index Bullish ETF (UUP): ETF Research Reports
SPDR Gold MiniShares Trust (GLDM): ETF Research Reports
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Zacks Investment Research