Gold ETFs, Rate Cuts and the Fed: Is Caution in Order?

Gold ETFs, Rate Cuts and the Fed: Is Caution in Order?

Duke's Campbell Harvey suggests gold's recent highs may not linger, despite Chinese buying.

Reviewed by: Staff
Edited by: Ron Day

While gold prices are about $150 off their all-time nominal highs of just under $2,500 an ounce, the yellow metal can usually be counted on to get a boost whenever soft economic data suggests the Federal Reserve may be cutting interest rates this year.

The central bank isn’t expected to cut rates Wednesday as it concludes its June meeting, with the CME FedWatch Tool suggesting a better-than 99% probability the Fed will stand pat. When the Fed eventually cuts rates—the FedWatch tool shows about a 47% chance that happens in September—it might be a bonanza for gold. Lower rates reduce the opportunity cost to hold gold since it pays no coupon and also pressures the U.S. dollar. The metal is denominated in dollars, so gold and the greenback often move inversely, all other things being equal.

Rate cuts may entice exchange-traded fund gold investors—who have been net sellers year-to-date according to data from the gold industry group World Gold Council—back into the market. 

Yet ETF buyers may want to wait. Duke University professor and gold expert Campbell Harvey says in a recent research paper that historically high real gold prices are associated with low inflation-adjusted returns over the subsequent 10 years.

Gold ETFs and Chinese Gold Buying

Harvey, professor at Duke University’s Fuqua School of Business, says in his May paper that after the U.S. went off the gold standard in 1975, there were three times when the “real” price of gold hit peaks: in 1980 when it was lifted by inflation and international conflicts; in 2011 during the debt-ceiling crisis; and in mid-2020 during the onset of the pandemic, only to have the real price fall again. 

Harvey calculates the “real” price of gold as the nominal gold price divided by the consumer price index level.

Source: Is There Still a Golden Dilemma? by Campbell Harvey and Claude Erb. May 2024.

While prices fell back all three times, the retreats in 2011 and 2020 weren’t as severe as in 1980, in part because the introduction of gold ETFs have put a structurally higher nominal price floor. However, even with that higher floor, the real price of gold hasn’t gained that much, he says, is around $730 in 1982 dollars, when the Fed began to cut interest rates in the 1980s. Gold peaked at $850 in 1980, and would be worth $3,425.65, according to the CPI inflation calculator.

Over the past 17 months, voracious Chinese buying has lifted gold prices enough to offset the net selling by ETF owners, according to Harvey's paper. Some in gold circles are debating whether the strong Chinese buying has created another structurally higher gold price. The Asian nation may be stockpiling gold as a “de-dollarization” attempt, Harvey says, referring to a comment Chinese President Xi Jinping made at the 2023 BRICS Summit, where he suggested the need for “reform of the international financial and monetary system.” That reform is seen as finding an alternative currency to the U.S. dollar for commercial and financial transactions.

Whether China can create a credible China-led gold standard, “seems like a real stretch,” Harvey says, noting that for China to own at least the amount of gold the U.S. has per capita (currently over 8,100 metric tons), the Asian nation would have to purchase all global gold production for the next nine years. That estimate is based on publicly available data about Chinese holdings, which may be underreported, he adds.  

Price of GLD ETF since inception

No matter how much gold China has, Harvey questions if it will it be enough to create a Chinese gold standard. “If you just look at the U.S. experience, you might conclude no, because if the answer was yes, we might still be on the gold standard, but we’re not,” he said in a phone interview.

History tells us this is not the time to buy gold, Harvey says, but the question for ETF buyers is whether China’s buying has changed the market. “This time could be different indeed, but I always say that every time is different,” he says. 

According to the fund screener, the three biggest gold ETFs are the $63.4 billion SPDR Gold Trust (GLD), the $28.9 billion iShares Gold Trust (IAU) and the $7.47 billion SPDR Gold MiniShares Trust (GLDM). GLD has gained 17% over the past year, less than the 27% gain in the S&P 500 as measured by the SPDR S&P500 ETF Trust (SPY).

Debbie Carlson focuses on investing and the advisor space for U.S. News. She is an internationally published journalist with bylines in publications including Barron's, Chicago Tribune, The Guardian, Financial Advisor, ETF Report, MarketWatch, Reuters, The Wall Street Journal and others.