ETF Spotlight: GLD Rides on Fed’s Non-Hike

This week’s Spotlight ETF stands out for reflecting, or maybe exaggerating, the mood of the financial markets as investors interpreted the latest signals presented by the Federal Reserve.

The $58 billion SPDR Gold Trust (GLD), which had been bouncing along without making much noise until it started climbing in early March, spiked by more than 2% in a matter of hours Wednesday in response to the Fed’s decision to not adjust interest rates at this time.

The ETF, which directly holds the physical metal, moved in stride with the price of gold as it reached an all-time high of $2,222.39 per ounce.

By Thursday morning, the price of gold had fallen back from its high, but not by much as the Fed’s hold is being viewed as dovish because the expectations are still for three interest rate cuts this year.

“I look at gold as a proxy for real interest rates, which tends to explain the move in gold and the inverse move in the dollar,” said Stephen Kolano, chief investment officer at Integrated Partners in Waltham, Mass.

“As expectations of interest rate cuts increase in probability, gold tends to strengthen and the dollar tends to weaken as market expectations in the future discount real interest rates declining and the chance that inflation increases erodes the real value of the dollar and the hedge to that is gold as both an inflation hedge and store of value,” he added.

GLD Rallies on Outlook for Rate Hikes

While Fed Chairman Jerome Powell said Wednesday that the overnight rate would remain unchanged at between 5.25% and 5.5%, marking the fifth consecutive meeting of holding rates steady, the market is pricing in a 70% chance of the Fed cutting rates in June.

“Powell and company brushed off the last two months of elevated inflation as mere bumps in the road, suggesting that they are okay with inflation staying higher than their 2% target for at least a while,” said Sumit Roy, senior ETF analyst at etf.com.

Jacob Diaz, co-founder of Genesis Gold Group in Los Angeles, cited the 11.9% increase in the price of gold over the past 12 months as evidence that the precious metal has been defying traditional market principles for much of the past year, and said the recent rally was driven by multiple factors.

“You’ve got geopolitical conflicts, there are global central banks increasing their ownership of gold, and there are institutional purchasers,” he said. “It’s the perfect storm.”

Gold, which has low correlation to most other asset classes, has historically been considered a secure store of value in times of extreme economic unrest.

Diaz said gold surprised market watchers last year by performing so well while the Fed was still struggling to manage inflation.

“Generally speaking, falling rates would be helpful for gold because the implication is the Fed won’t be fighting inflation aggressively,” he said. “Right now, it’s difficult to pinpoint the price of gold on just one factor.”

GLD, which is up 4.5% from the start of the year, has experienced more than $2.5 billion worth of net outflows this year, but the string of weekly outflows reversed over the past two weeks with net inflows for the week ending March 11 at more than $1.1 billion and nearly $480 million for the week ending March 18.