Gold ETF GLD Glitters as Fed Rate Cut Nears

Gold nears an all-time high as the dollar weakens ahead of Fed actions.

The price of gold is riding high on a slightly weaker dollar and the prospect of 50-basis point interest rate by the Federal Reserve this week.

The precious metal, historically viewed as a portfolio diversifier and safe-haven play, has soared this year as illustrated by the SPDR Gold Trust ETF (GLD), which is up nearly 25% this year and nearly 34% over the past 12 months. The fund is little changed today.

GLD is handily topping broader markets, as measured by the SPDR S&P 500 ETF Trust (SPY), which has gained 19% so far this year and 28% over the past 12 months.

“Gold is an uncorrelated asset that actually has relatively mediocre returns over the long term,” said David Demming, president of Demming Financial Services Corp. in Aurora, Ohio. “But, because of the lack of correlation, it can be a moderate diversifier,” he added.

GLD Inflows, Spot Gold

The spot price of gold, at $2,595 in morning trading, is hovering near an all-time high and may rise further still if a series of rate cuts are enacted as widely anticipated.

The $70 billion GLD has experienced $3.6 billion worth of net inflows over the past three months, including $650 million over the last three trading days.

GLD 1-month net flows

Source: etf.com

Paul Schatz, president of Heritage Financial in Woodbridge, Conn., sees longer-term drivers behind the rising price of gold, but also believes it has become a shorter-term play for active traders.

“For traders, they will buy gold on any and all weakness until at least halfway through the rate cut cycle or until other nations become even more dovish,” he said.

Schatz pointed to aggressive buying of the precious metal by the Chinese government, “putting an epic bid beneath the market as they prepare for some kind of war, either economic or military.”
“Also, our FOMC seems to be the most dovish Fed of the developed nations which is basically going to devalue the dollar,” he added. “A lower dollar equals stronger gold, which is usually a very strong correlation.”