What Lies Ahead For Gold ETFs?

Gold ETFs have been in the news lately. Although on one hand geopolitical risks have increased the appeal of some of these funds as safe-haven investments, a rising greenback and fears of rising rates are weighing on their performance.

Factors Driving Prices

Bond yields have been on an upward trend lately and 10-year yields crossed 2.85% recently, as investors grow optimistic about the economy and bet on growing inflation. Stronger wage growth added to inflation fears. Per latest data released by the Labor Department last week, wages grew 2.9% year over year in January compared with 2.6% in the prior month, the highest pace since April 2009.

Also, non-farm payrolls came in at 200,000 for January compared with economists’ forecast of 180,000. Unemployment rate remained steady at 4.1%. As a result, the greenback has been rallying and weighing on gold prices. PowerShares DB US Dollar Bullish ETF (UUP - Free Report) is up around 1.4% in the past five days.

Moving on to interest rates, the Fed is widely expected to hike interest rates multiple times this year to tame inflation, and markets are betting on the Fed to hike rates more than three times suggested by Fed earlier. Per the CME Fed Watch tool, there is a 71.9% chance of a 25 basis point rate hike in March.

Hikes in interest rates lead to higher bond yields and dampen the demand for non-yielding gold. Per a Reuters article, citing a statement by Stephen Innes, head of trading APAC at OANDA, “The shifting Fed narrative that is gathering hawkish following could be the most significant thorn in the Gold Bulls side.”

For argument’s sake, the biggest gold ETF SPDR Gold Shares ETF (GLD - Free Report) witnessed $506.1 million in outflows in the Feb 1-Feb 7 period, per etf.com data.

Let us now discuss a few ETFs focused on providing exposure to the space.

SPDR Gold Shares ETF (GLD - Free Report)

This fund offers physical exposure to gold. It seeks to track the performance of the gold bullion and might turn out to be a cost-efficient way of gaining exposure to the commodity even after accounting for the fund’s expenses.

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