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Get Ready for a Gold Rush: ETFs in Focus

The year-to-date performance has been upbeat for gold bullion (up about 13.5%) due to the safe-haven rally. The coronavirus outbreak kept global markets edgy at the start of the year and boosted the appeal for this precious metal.

While the momentum has slowed a bit in the past one-month period (bullion down about 1%) due to rising risk-on sentiments, things again started looking brighter for the gold space.  Here’s why.

Second Wave of Coronavirus Contagion

With the reopening, coronavirus cases are rising in the United States. About 10 states are seeing their highest seven-day average of new coronavirus cases per day since the pandemic started months ago, according to a CNN analysis of data from Johns Hopkins University.

The states registering record-high averages are Alabama, Arizona, California, Florida, Nevada, North Carolina, Oklahoma, Oregon, South Carolina and Texas. Notably, Texas reported a record-high number (2,326) of daily COVID-19 hospitalizations on Jun 15. All these would boost safe-haven trade and the resultant demand for gold.

Dovish Fed

The Fed has been acting super-dovish since March. It announced zero rates and launched a QE. The Fed has also dipped its toe into the buying of investment-grade corporate bonds, high-yield bonds, collateralized loan obligations and commercial mortgage-backed securities.

Most recently, the Fed announced that it is willing to the expand the terms of its $600 billion yet-to-be implemented Main Street Lending Program to make it accessible to a greater number of struggling companies.Such measures should keep the dollar’s strength in check. U.S. dollar ETF Invesco DB US Dollar Index Bullish Fund UUP has shed about 3.4% in the past month.

IMF’s Muted Global Growth Forecast

The IMF forecast in April a contraction of 3% for the global economy this year. Now, despite some economies starting to lift lockdown, the fund has cautioned that the decline could be even worse this year. “For the first time since the Great Depression, both advanced and emerging market economies will be in recession in 2020. The forthcoming June World Economic Outlook Update is likely to show negative growth rates even worse than previously estimated,” per Gita Gopinath, IMF’s chief economist. This fear factor will work wonders for gold.

Strong Safe-Haven Demand Despite Bear Market Rallies

Notably, demand for safe-haven gold will stay strong despite bear market rallies as several Wall Street analysts still believe that the latest northward journey for stocks doesn’t have legs. Plus, not only the Fed, most developed and emerging economies have been on a policy easing mode, offering a hefty stimulus to fight the novel coronavirus.

The ECB and the BoJ have benchmark interest rates in the negative territory. Right now, real U.S. treasury yields are negative from the five-year to 20-year term and this lowers the opportunity cost of holding a non-interest-bearing asset like bullion.

Even though stock and bonds markets rallied in May, gold remained steady. Gold prices in U.S. dollars were higher by 2.6% in May. According to new World Gold Council data, gold-backed ETF inflows in the last five months outstripped records for any whole calendar year, hitting record-high AUM of $195 billion. Net inflows for May were up 4.3%.

Low Oil Prices a Big Plus for Gold Miners

Mining companies’ 50% of production costs are closely linked to energy prices. Chances of a decline in oil prices amid poor refiners’ margins and moderate rebound in economic activity should work wonders for gold miners’ operating margins. Notably, coronavirus-led demand disruptions have been weighing on oil prices.

Against this backdrop, below we highlight a few gold bullion as well as gold mining ETFs that could be interesting plays in the near term.

ETFs in Focus

For bullion investing,SPDR Gold Trust (GLD),iShares Gold Trust (IAU), Aberdeen Standard Physical Gold Shares ETF (SGOL) and GraniteShares Gold Trust (BAR) are lucrative options. Among mining ETFs, VanEck Vectors Gold Miners ETF (GDX), VanEck Vectors Junior Gold Miners ETF (GDXJ), iShares MSCI Global Metals & Mining Producers ETF (PICK) and Sprott Gold Miners ETF (SGDM) are good bets.

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SPDR Gold Shares (GLD): ETF Research Reports
Aberdeen Standard Physical Gold Shares ETF (SGOL): ETF Research Reports
Invesco DB US Dollar Index Bullish ETF (UUP): ETF Research Reports
Sprott Gold Miners ETF (SGDM): ETF Research Reports
VanEck Vectors Gold Miners ETF (GDX): ETF Research Reports
iShares MSCI Global Metals Mining Producers ETF (PICK): ETF Research Reports
VanEck Vectors Junior Gold Miners ETF (GDXJ): ETF Research Reports
GraniteShares Gold Trust (BAR): ETF Research Reports
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