Gold ETFs: Waiting on 2024 Rate Cuts

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On July 26, the Federal Reserve unveiled an interest rate increase of 25 basis points while leaving room for another rate hike increase later this year. The central bank’s 11th rate boost since March 2022 took its benchmark rate to a 22-year high. This could benefit gold ETFs.

As was seen in 2022, gold and exchange traded funds such as the SPDR Gold Shares (GLD) and the SPDR Gold MiniShares (GLDM) typically don’t take kindly to Fed tightening. The reasoning is simple. Bond yields reflect higher interest rates, thus implying higher levels of income while making bonds more attractive than gold, which doesn’t offer coupon payments or dividends.

Despite multiple rate increases this year, gold and the related ETFs are performing admirably. GLD, the largest gold-backed ETF as measured by assets, is higher by 8% year-to-date. That bullishness could be a sign that bullion is finally living up to its inflation-fighting reputation. It could also indicate that markets are pricing in 2024 rate cuts or both.

Some market observers speculate that should those rate cuts arrive next year, the runway could clear for the yellow metal to reach record prices.

Bullish on Bullion

In a Wednesday briefing, Greg Shearer, JPMorgan executive director of global commodities research, said 2024 rate cuts by the Fed could act as a major catalyst for gold upside and could drive the yellow metal to record prices.

“We’re in a very prime place where we think gold ownership and long allocation to gold and silver is something that acts as both a late cycle diversifier and something that will perform as we look to the next sort of 12, 18 months,” noted the strategist.

In what could be a boon for ETFs such as GLD and GLDM, Shearer believes gold can ascend to $2,000 per troy ounce by the end of this year. JPMorgan’s average price target for the yellow metal for the fourth quarter of 2024 is $2,175 per ounce.

On the webcast, Shearer added that there’s “an eagerness here” among global asset allocators to diversify away from traditional currencies. Gold has long been one of the primary alternatives for money managers looking to reduce exposure to fiat currencies.  There are other factors that could augur well for GLD and GLDM in the second half of 2023.

“Money managers’ net-long positions in gold futures have increased this year, but the trade still isn’t too crowded, he said. Other sources for physical demand have also come into effect, with central bank purchases becoming an increasingly strong driver of prices,” according to Bloomberg.

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Article by Tom Lydon, ETF Trends